^'^^r/^. 



LIBRARY OF CONGRESS. 






Cliap. :r..„ Copyright ^^o._ 



UNITED STATES OF AMERICA. 



BUSINESS LAW 



A TEXT-BOOK FOR SCHOO. 



IGES 



THOMAS RAEBURN WHITE, B.L., LL.B. 

OF THE PHILADELPHIA BAB 

LECTURER ON LAW IN THE UNIVERSITY OF 

PENNSYLVANIA 



WITH AN INTRODUCTION 

BY 

BOLAND P. FALKNER, Ph.D. 

ASSOCIATE PROFESSOR OF STATISTICS IN THE UNIVERSITY 
OF PENNSYLVANIA 




SILVER, BURDETT AND COMPANY 

NEW YORK BOSTON 



CHICAGO 



83385 



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Iwu CcmZS R£{E5VF.O 

DEC 3 1900 

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SECOND COPY 

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Copyright, igoo, 
By silver, BURDETT AND COMPANY. 



CONTENTS 



PAOB 

Introduction vii 

Preface , , . . . xi 

Suggestions to Teachers xiii 



PAET I. INTEODUCTORY 

Chap. I. The General Eield of Law .... 1 
Chap. II. Divisions of Municipal Law .... 12 



PAET II. CONTEACTS 

Section I. Formation of Contracts 17 

Chap. I. Nature of the Contractual Relation . . 17 

Chap. II. Capacity of the Parties 19 

Chap. III. Offer and Acceptance 26 

Chap. IV. Form and Consideration 42 

Chap. V. Reality of Consent 71 

Chap. VL Legality of Object 92 

Section II. Persons affected by Contract . . . 100 

Chap. I. Upon whom the Formation of Contract may 

confer Rights and Liabilities . . . 100 

Chap. II. Assignment of Contracts by the Acts of the 

Parties 103 

Chap. III. Assignment of Contracts by Operation of Law 106 

Section III. Interpretation of Contracts . . . .114 
Chap. I. General Rules for Interpretation of Contracts 114 
Chap. II. Explanation and Alteration of Written Con- 
tracts 119 

Section TV. Discharge of Contracts 125 

Chap. I. Discharge by Agreement .... 125 

Chap. II. Discharge by Performance .... 127 
iii 



iv CONTENTS 



PAGE 

129 

134 
137 



Chap. m. Discharge by Breach .... 
Chap. IV. Discharge by Impossibility of Performance 
Chap. V. Discharge by Operation of Law 

Section V. Remedies for Breach of Contracts . . 139 

Chap. I. Remedies in Courts of Law . . . . 139 

Chap. II. Remedies in Courts of Equity . . . 141 
Chap. III. How Rights of Action, arising from Breach of 

Contract, may be Discharged . . . 145 

PAET III. SALES 

Essential Characteristics .... 148 

Who may Sell 151 

When the Title to the Goods Passes . . 157 

Conditional Sales 161 

Warranties 166 

Mutual Remedies of the Parties . . . 169 

PAET IV. NEGOTIABLE CONTEACTS 

Essential Characteristics of a Promissory Note 175 

Essential Characteristics of a Bill of Exchange 182 

How the Acceptance must be Made . . 186 
How Negotiable Paper Circulates . . .188 

Liability of the Maker of a Note . . . 191 

Liability of the Acceptor of a Bill of Exchange 194 

Liability of Drawer and Indorser . . . 196 

Negotiations of Bills and Notes . . . 213 

Conflict of Laws 228 

Checks 230 

PAET V. CONTEACTS OF COMMON 
CAEEIEES 

Section I. Carriers of Goods 233 

Chap. I. Essential Characteristics of Common Carriers 233 

Chap. 11. Duties of Common Carrier toward the Public 237 

Chap. III. Liability of the Common Carrier . . . 241 

Chap. IV. Rights of the Common Carrier . . . 250 



Chap. 


I. 


Chap. 


II. 


Chap. 


HI. 


Chap. 


IV. 


Chap. 


V. 


Chap. 


VI. 


PAET 


Chap. 


I. 


Chap. 


II. 


Chap. 


III. 


Chap. 


IV. 


Chap. 


V. 


Chap. 


VI. 


Chap. 


VII. 


Chap. 


VIII. 


Chap. 


IX. 


Chap. 


X. 



CONTENTS 



Section II. Carriers of Passengers . 

Chap. I. Duties toward the Public 

Chap. II. Liability of the Carrier of Passengers 

Chap. III. Rights of the Common Carrier of 



PAGB 

252 
252 
255 
269 



PART VI. AGENCY 



Chap. 


I. 


Chap. 


II. 


Chap. 


III. 


Chap. 


IV. 


Chap. 


V. 


Chap. 


VI. 



Classes of Agents . . 
Creation of Relation of Principal and Agent 
Liability of Principal for Acts of Agent . 
Liability of the Agent for his Acts . 
Mutual Duties of Principal and Agent . 
How the Relation of Principal and Agent 
may be Terminated 



260 

263 
267 
276 
279 

284 



PAET yil. BUSINESS ASSOCIATIONS 

Section I. Partnership 286 

Chap. I. Essential Characteristics of a Partnership . 286 

Chap. II. Property of the Partnership .... 291 

Chap. III. Liability of the Partners 296 

Chap. IV. Conduct of the Business 301 

Section II. Corporations 306 

Chap. I. Essential Characteristics of a Corporation . 306 
Chap. II. Liability of Stockholders of a Corporation 

Regularly Organized 314 

Chap. III. Liability of Stockholders of an Irregular Cor- 
poration 319 

Chap. IV. Rights of Stockholders 323 

Chap. V. Liability of a Corporation .... 329 

Chap. VI. Relation of a Corporation to the State . . 334 

Section III. Limited Partnerships and Joint-Stock Com- 
panies 336 

Chap. I. Limited Partnerships 336 

Chap. II. Partnership Associations or Joint-Stock Com- 
panies 338 



INTRODUCTION 

THE STUDY OF COMMERCIAL LAW IN SCHOOL 
AND COLLEGE 

The selection of school and college studies is made from the 
double point of view of discipline and utility. The time-honored 
subjects of instruction have acquired a prestige for discipline of 
the mind which is not to be shaken, and when advocates of 
newer branches of study dwell upon the utility of such subjects, 
they are frequently met with distrust, which finds expression in 
the fear lest something of the discipline of the older studies be 
lacking in the new. Nor can it be doubted that the utility so 
frequently claimed for newer studies would be purchased at too 
high a price if clear training of the intellect, with breadth and 
readiness of mind, be sacrificed to gain it. These several proposi- 
tions form the basis of the strife which in recent years has agitated 
educators, and which has flamed with peculiar violence about all 
proposals for a commercial education. It is not to stir the fires 
of controversy, or to balance the rival claims of conservatives and 
innovators, that we have repeated the watchwords of the con- 
tending parties, but rather to discover what light the discussion 
may throw upon the place and purpose of the study of commercial 
law in school and college. 

The contrast of discipline and utility has sometimes been pushed 
so far that disputants seem to believe that disciplinary studies 
cannot be useful, nor useful studies disciplinary. A distinguished 
jurist is reported to have said that while in his younger days 
all cases appeared to him either white or black, to his maturer 
vision they seemed mostly gray. What is true of actions of law 
is true in large measure of other controversies. In education, 
discipline and information are not hostile, but complementary, 
they are two means of promoting mental growth, the problem 
which lies at the root of all serious educational effort. They 
may, indeed, be combined in unequal proportions in different 
branches of study, but so far from being mutually exclusive, 
they are generally found to be united. Among the studies which 
the demand for a practical, or rather a commercial, education 

vii 



vni INTRODUCTION 

has introduced into schools and colleges, few present so happy a 
blending of discipline and information as that of the commercial 
law. 

The study of the law disciplines the mind in precision of 
thought and statement, and in logical reasoning. Above all things, 
the law is precise. It abhors vagueness, and tolerates no loose- 
ness of thought. To gain precision of terms, it frequently adopts 
modes of speech which seem prolix and barbarous, and which 
have been the frequent butt of jest and ridicule. But even this 
legal phraseology, with which, moreover, an elementary study of 
the law has little to do, has its uses. Partly because of their 
long-continued use, and more especially because they have been 
frequently passed upon by the courts, words and phrases which 
provoke the merriment of the layman have acquired a definiteness 
of meaning which no new formulation could give. 

It is the spirit of the law to be exact. It means exactly what 
it says, and, under the searching analysis of generations of judges, 
the phrases it employs have a precision of meaning which is often 
lacking in other sciences. The student has missed the point of 
his study if he does not catch this spirit of preciseness, and it is 
a lesson of first importance to the pupil. The faculty of clearly 
stating facts in terms which admit of no question is one of the 
preeminent marks of a trained mind. But this mental quality, 
like all others, must be trained to be perfected, and for such train- 
ing the study of law can hardly be excelled. One need not be 
versed in all the refinements of legal knowledge to appreciate the 
truth of this statement. The understanding of the simple rules 
which govern the elementary principles of law requires and pro- 
motes a grasp of language and a comprehension of the exact pur- 
port of verbal statements, whose worth cannot be estimated. 

With precision of statement, the study of the law promotes 
clearness of thought. Its principles are but few, while their appli- 
cations are innumerable. To apply a general principle to a par- 
ticular set of facts, or to contrast different sets of facts with the 
legal decisions upon them and thus evolve general principles of law, 
off'ers an excellent training in applied logic. As the student pro- 
gresses, he becomes impressed with the reasonableness of the law 
as it unfolds before him in a clear, logical system. Many times 
have I been told by a student that a solution stated did not seem 
to him so much the law as it was common sense. Nor was the 
student wrong in his intuitions, for with the homely phrase " com- 
mon sense " we are prone to designate what we deem perfect logic. 



INTRODUCTION IX 

The student is helped and stimulated by finding so much that 
seems to him common sense embodied in the law. It strengthens 
his reasoning powers to find their conclusions thus confirmed, and 
stimidates them by directing his thoughts into new channels, and 
to new applications of what he has learned. 

This is particularly true in the study of contracts, which forms 
so large a part of the commercial law. The student learns that it 
is the purpose of the law to carry out the clearly expressed inten- 
tions of the parties. But he finds that parties to a contract fre- 
quently fail to express their intentions in a clear and unequivocal 
fashion, and that ndes of law grow up which have no other pur- 
pose than to establish normal rules of conduct. The law assumes 
that one man does as others do in like circumstances. Thus the 
inherent reasonableness of the law is impressed upon the student, 
and he is encom-aged to test its rules by the dictates of what he 
calls common sense. If that fails to reach a given set of facts, 
he has arrived at a point where he can see clearly that in such 
case it is more important to have a rule than that the ride should 
be one way or the other. He then appreciates that there may be 
situations where the courts say thus and so is the law, and where 
legal writers flounder in their attempts to furnish an explanation. 

So much for the disciphnary advantages of the study of the law, 
which, strong as they are, will doubtless appeal with greater force 
to the teacher than to the pupil. In pointing out the practical 
advantages of a study of the law, we need have no fear that the 
student will fail to grasp them. Whether or not he intends at 
some future day to practise the law as a profession, he will read- 
ily recognize that contracts, notes, sales, agency, partnership, and 
transportation concern everybody. He does not have to be told 
that all business rests upon contracts of various kinds, and he 
readily comprehends that some knowledge of the law is a valuable 
adjunct to any one who has business affairs. Indeed, if it is 
pointed out to him, he will be quick to grasp the fact that edu- 
cated men of the world must of necessity have some knowledge of 
the famdiar laws of business contracts. Without such knowledge, 
gained perhaps through a long period of business experience, they 
would be helpless in the transaction of their affairs. 

This indicates the limits within which the study of the law can 
properly be introduced into schools and colleges. Instruction in 
law must here aim to give that knowledge of the law which forms 
a part of the mental equipment of the well-informed man of affairs. 
Beyond this it cannot go. Other ideals would defeat the purposes 



X INTRODUCTION 

of general instruction. To give the knowledge of the expert, or 
even to strive to do away with the necessity for expert advice, is 
not to be thought of. In short, the aim of this instruction should 
be to enable a man to know when he needs the services of a lawyer, 
rather than to encourage him in the belief that he can dispense 
with such services. 

As a means of cultivating mental power and imparting the 
degree of information suggested, the study of the law has an appro- 
priate place in schools and colleges. The experience of ten years 
strengthens the writer's conviction that the study is interesting to 
the pupil and helpful to him. Its extremely practical bearing on 
the affairs of everyday life affords a host of opportunities for those 
mutual discussions of teacher and pupil which are among the most 
fruitful experiences of the class room. 

Speculation on education is prone to outrun its practice. It is 
not enough to decide that a subject is fitted for instruction. 
Before you can carry an ideal into practice, you must find the 
teacher, and before it becomes general, you must find the text-book 
which adapts the subject to the purposes of instruction. I believe 
that Mr. White has written such a book, and I congratulate him 
upon the service he has rendered to teachers. It has been my 
privilege to examine carefully the manuscript of this work, and to 
offer such suggestions as were dictated by ten years' experience in 
teaching the subject. 

Mr. White has sought, above everything else, to give an orderly 
and logical presentation of the subject of commercial law. His 
work is designed as a text-book, and in no sense as a reference 
work. So far as possible, technical terms have been avoided, and, 
when necessary, have been explained. There has been no attempt 
to disguise the difficulties of the law, but every effort has been 
made to make them plain by lucid exposition and frequent illus- 
tration. Mr. White has cherished the idea that a book upon the 
law need be neither abstract nor disconnected. As a member of 
the Law Faculty of the University of Pennsylvania, it has been 
his duty to expound the law to students, and he has sought in this 
book to present in simple language the elements of the law in such 
a way that the subject gradually unfolds before the student, and 
leads him, step by step, in a natural, logical manner from one 
proposition to another. In this effort, he has been unusually suc- 
cessful, and this trait of the book will, I am confident, recommend 
it to teachers. 

ROLAND P. FALKNER. 



PREFACE 



The object of this book is to present the elementary principles 
of law relating to the more common business transactions, in a 
style so clear and free from technicality that they can be readily 
understood by persons unused to legal phraseology. Any school- 
boy can understand these principles if they are placed before him 
in simple English, freed from legal verbiage. The law of contracts 
has been said to be nothing more than the law of common sense. 
The same may be said of the law of sales and agency. The dis- 
cussion of negotiable contracts, common carriers, and business 
associations involves the use of somewhat more technical lan- 
guage, but the fundamental principles of these also are neither 
difficult nor obscure. It is the hope of the author that the book 
will afford a knowledge of these subjects, thorough, if elementary, 
and that it will do it in such a way that the student may not 
feel that he is studying a mere compendium of information. 

The first part of the book is devoted to a brief discussion of law 
in general, a study of how it originated, how it develops, and how 
it has been divided into its many ramifications. The other parts, 
in order, treat of the subjects mentioned above. They do not 
pretend to offer a complete technical knowledge of any subject, 
but it is believed that they cover the leading principles in a thor- 
ough and connected manner. 

It has not been the aim of the writer to offer any new legal 
principles. The originality of the work consists only of its arrange- 
ment and the manner of treating its subject-matter. He has freely 
made use of standard text-books and collections of cases, in order 
to arrange the subject in the clearest possible manner, and to 
eliminate whatever might be omitted without detracting from the 
value of the work as a text-book. The more technical discussion 



Xll PEEFACE 

has been arranged in such a way that it may be studied or not, 
as the teacher sees fit, without destroying the continuity of the 
text. No cases have been cited, as the work is not intended for 
the use of lawyers. 

If the book succeeds in giving a practical insight into one of the 
greatest of sciences, and in inspiring a love for it which shall lead 
to a deeper study, it will have accomplished its purpose. 

The writer desires to acknowledge his indebtedness to Professor 
Koland P. Falkner for his invaluable suggestions and advice, and 
for his able criticism of the book in manuscript. 



THOMAS RAEBURN WHITE. 



Philadelphia, 
November, 1900. 



SUGGESTIONS TO TEACHERS 



Peimaeily this work was prepared for use in schools and col- 
leges. The subject of which it treats has therefore been arranged 
with a view to its being taught according to a definite plan. 

The purpose of Part I. is to introduce the student to the field 
of legal learning — to show him how the law has been built up, 
and to give him some idea of its extent and its many subdivisions. 
Every class should of course read Part I. 

Part II. leads to the distinctive branch of law which the book 
investigates — that treating more particularly of the dealings 
between man and man. Nearly all the subjects covered concern 
some phase of the law of contracts. The second part is intended 
to give the student a thorough knowledge of the meaning of a con- 
tract. It discusses, with some minuteness, its essential elements 
and its effect upon the parties bound under it. This part of the 
book is subdivided into sections. Sect. I., dealing with the " For- 
mation of Contracts," should be studied in its entirety. 

In Chap. VI., Sect. I., we meet for the first time a paragraph 
which is marked with a letter (A) instead of a number. The 
purpose of thus designating certain paragraphs by letters is to 
indicate those which, in the opinion of the author, are either too 
technical for the more elementary students, or which may be 
omitted in the study of the subject without serious loss. It will 
be found that the omission of these paragraphs will not disturb 
the continuity of thought, as the same matter is, wherever neces- 
sary, briefly stated in a previous numbered paragraph. Such 
statements are brief and general, serving as an introduction to the 
more detailed examination in the lettered paragraphs, which may 
be read or omitted, as may seem preferable. 



XIV SUGGESTIONS TO TEACHERS 

In Sects. II., III., IV., and V., of Part II., many lettered para- 
graphs will be found. In some cases, whole chapters, vide Chap. V., 
Sect. IV., consist wholly of such paragraphs. In such cases the 
entire chapter may be omitted. "With very young classes. Sects. 
II., III., and IV. may be omitted altogether. Sect. V., however, 
should be given at least a brief study by all grades. 

Part III., " Sales," will be easily understood by the pupil who 
has studied the numbered paragraphs in Part II. All that follows 
Part II. presupposes a study of these paragraphs, and is much 
briefer, inasmuch as a thorough knowledge of elementary principles 
is assumed to have been gained. 

Part IV., "Negotiable Contracts," is one of the most important 
sections in the book, but, at the same time, one of the most diffi- 
cult. The more elementary classes may do well to omit it, and 
study Parts V. and VI., " Contracts of Common Carriers " and 
"Agency," in order, as these are short and easy to understand. 
All classes, however, should, if possible, take " jSTegotiable Con- 
tracts " in its order, as it logically comes before the study of con- 
tracts of common carriers. 

Part VII., "Business Associations," while it treats of a very 
interesting and important subject, is the most difficult part of the 
book. Only well-advanced classes should attempt to give it a 
thorough study. 

In Parts IV. and VII. many lettered paragraphs will be found. 
If the class is fairly well advanced, and time will permit, it will 
be better to omit nothing. But if lack of time prevents a thor- 
ough study, or if the class has difficulty in mastering the principles 
presented, the instructor, by observing the lettered paragraphs, 
will know what may safely be omitted. 

The division of the text into paragraphs was made with a view 
to assist the teacher in the assignment of lessons. The division 
into parts and chapters was made on the basis of logical sequence. 
In assigning lessons in the longer chapters {e.g., in Chap. V., 
Sect. I. of Part II.), it will be well to note the natural divisions 
of the chapter {e.g., in Chap. V., Mistake, Misrepresentation, 
Fraud, etc.). 

T. K. W. 



PAET I 

INTRODUCTORY 



CHAPTER I 

THE GENERAL FIELD OE LAW 

1. Meaning of " Law " ; Natural Laws. — " Law," in 
its broadest signification, means, "a rule laid down or 
established." In one way or another the word neces- 
sarily becomes familiar to us all. Students of science 
are familiar with the rules or laws which govern the 
nature and growth of plants and animals ; those who 
have studied chemistry know that certain combinations 
of elements always produce a given result ; students of 
mechanics know that certain combinations of forces 
produce a force of definite magnitude and certain direc- 
tion ; they can calculate precisely, even the strain 
supportable by a given structure. Every schoolboy 
knows of the law of gravitation which governs the 
attractions of bodies for each other, and controls the 
movements of the sun and planets. All these are 
natural laws, and, incidentally, laws that are never 
broken. Men have spent their lives in investigating 
them, but it is beyond their power to alter them in the 
slightest degree. 



2 INTKODUCTORY 

2. Laws governing Human Action ; their Origin. — 

When we turn to the laws which control human action, 
we are confronted by a very different situation. No 
absolute rules were laid down by the Creator of the 
Universe to govern the conduct of mankind. While 
plants conformed strictly to the laws governing their 
growth, and the lower animals followed the unerring 
instinct which is Nature's law for them, man, by virtue 
of his power to reason and to will, needed something 
more to regulate his actions. Primitive man, perhaps, 
had no more need of laws than other animals, but as 
his power to think developed, he realized that mere 
physical instinct was not a sufficient guidance for him. 
He began to appreciate the fact that his neighbor had 
rights as well as himself. He saw these rights often, 
almost continuously, in conflict with his own. He 
perceived that if he was not to live in continual physi- 
cal warfare it was absolutely necessary that the rights 
of all be regulated. Otherwise, his lot would be merely 
that of the wild animal, which maintains its cave dwell- 
ing by physical prowess, and is compelled to abandon 
it when it becomes old and helpless. A little later, the 
conception of right and wrong furnished another reason 
for the establishment of law. '' Might makes right " 
is not consistent with moral principle. 

In order, therefore, to protect himself in the quiet 
enjoyment of his property and to satisfy his conscience, 
man was compelled to make laws to govern his own 
conduct. These have grown as the race has grown, and 
are continually being altered, and, inasmuch as man has 
the power to obey them or not as he chooses, a punish- 
ment, called a "sanction," has been annexed to the breach 
of human laws to insure individual obedience to them. 



THE GENERAL FIELD OF LAW 3 

3. Classification of Laws. — In the beginning we have 
defined laws as " rules," and we will divide these 
rules into two general classes : the laAVS of Physical 
Science, which are natural laws, and the laws of Human 
Action, which are laws created by man for his own 
protection, except in so far as religious writings are 
considered to be laws laid down by the Deity. The 
laws of Human Action again are divided into four 
general divisions : the Moral Law, the Divine or 
Revealed Law, International Law, and Municipal Law. 

4. The Moral Law. — The moral law has never been 
very strictly defined, nor is it very clearly definable. 
It may be said to be a general feeling in the community, 
as an aggregate, as to what is right and what is wrong. 
The punishment annexed to it is the disapprobation 
which the community visits upon the individual who 
oversteps the bounds. It changes, at least in some 
particulars, with every decade, and differs in different 
sections of the world, though a few cardinal principles 
are the same everywhere. 

5. The Divine, or Revealed Law. — The divine or 
revealed law consists of those commands laid upon 
men, as they believe, by divine beings. They are 
usually contained in some kind of religious writings ; 
throughout Christendom they are found in the Scrip- 
tures. This law is astonishingly similar whether you 
find it in the Bible, in the Koran, or in the writings 
of Confucius or of Buddha. This is no doubt true 
because revelation is often supplemented by man's 
conception of what should be, or, in other words, by 
his conscience; and men's consciences, in the light of 
the education they have had, all have the same general 
tendency. The divine law has a double means of 



4 INTRODUCTORY 

enforcement. It offers the hope of a reward in the 
future existence for conformance with its injunctions, 
and threatens eternal punishment as its "sanction." 
While few people strictly conform to this law, it 
is safe to say that it has a greater influence upon the 
everyday life of mankind than any other, and should 
never be thought of inconsiderately. 

6. International Law. — International law, in its gen- 
eral or public sense, consists of those rules or precedents 
or customs by which independent nations have agreed, 
either expressly or tacitly, to govern their dealings 
with each other. This law approaches very near to 
Darwin's law of the survival of the fittest, and some- 
times seems to be subject to change without notice. 
There are, however, a great many rules, such as those 
relating to the safety of ambassadors, by which the 
conduct of nations is so far regulated that few would 
think of violating them. Only strictly independent 
nations are recognized by international law. 

7. Municipal Law. — Municipal law, with which we 
are concerned in this work, consists of those rules by 
which the civil conduct of the citizens and residents 
of a nation is regulated. The word "municipal," as 
here used, means all laws which control the actions of 
the inhabitants of states or nations. It does not refer 
to city law alone. Notice that municipal law goes no 
further than to prescribe a rule of civil conduct, i.e. the 
state regulates the actions of its citizens only so far 
as they might interfere with the rights of other men. 
Unlike the moral and divine law, it exists solely for 
the protection of men against each other, and takes 
cognizance of actions only. When it has performed 
that function its work is done. A man may be as 



THE GENERAL FIELD OF LAW 5 

wicked as he pleases, the municipal law will not inter- 
fere with him so long as he does not interfere with any- 
body else. Municipal law may be either written or 
unwritten. 

8. Written Law. — Written or statutory law consists 
of positive enactments laid down by the legislating 
body of the state, as acts of Parliament in England, or 
acts passed by Congress, or by state legislatures, or by 
city councils. These acts are usually enacted to meet 
some need peculiar to the territory to which they apply. 
In some instances they are simply declaratory of known 
principles of law, and in others* they are passed for the 
purpose of varying or contradicting such known prin- 
ciples. According to the ancient principles of un- 
written law, a married woman could not hold personal 
property, or make contracts. Now, by statutes passed 
in most states of this country, her disability is removed, 
and she may act as freely in all legal matters as a single 
woman. 

9. Unwritten Law ; Civil Law. — Unwritten law, 
which is by far the most important body of law, is, so 
far as concerns English-speaking people, of two general 
divisions; the civil law and the English common law. 
The civil law forms the basis of all the continental 
European systems of jurisprudence, and has very largely 
affected English and American law. It consists of the 
laws promulgated by the Roman People from the time 
of the Tarquinian kings to the downfall of the Empire, 
including not only the edicts of the kings, senate, and 
emperors, but also legal decisions and opinions of 
learned writers bearing upon the same. This great 
body of laws was codified, i.e. was arranged, classified, 
and promulgated during the reign of the Emperor Jus- 



6 INTRODUCTORY 

tinian and by his orders. This was in the sixth cen- 
tury A. d. This compilation is known as the Justinian 
Code. A reformation of this code was made by Napo- 
leon, and the Code Napoleon is used in France to-day. 
Various modifications of the latter code form a very 
important part of the law of those countries at that 
time under the sway of Napoleon, particularly Italy, 
Holland, Germany, and Spain. Napoleon's work as a 
law-maker may, to some extent, account for the domi- 
nance of military power in France, Napoleon himself 
being a thorough believer in the efficacy of military 
force, and a soldier rather than a statesman or a lawyer. 

10. Importance of the Civil Law. — The study of the 
civil law is important to us because it has very materially 
affected our own law. When William the Conqueror 
took the English throne, in 1066 A.D., he carried with 
him not only the French language and French customs, 
but also, to a considerable extent, French laws. More- 
over, some parts of our country, notably Louisiana, 
have been, and still are to a large degree, governed 
by French law rather than by the common law. All 
the territory which we formerly acquired from Spain, 
as well as our recent acquisitions, did and do contain 
the Spanish system of law, which of course is the civil 
law. 

11. The Common Law of England ; its Origin. — The 
common law of Enghmd, inherited by us from the 
mother country, is by far the most important to Ameri- 
can students. It is indigenous to English soil and 
had its origin in custom or usage. In very ancient 
times, before there were any organized courts, and when, 
indeed, there was little attempt at administration of 
justice on the part of the ruling power, the dealings 



THE GENERAL FIELD OF LAW 7 

of men with each other depended entirely upon custom. 
There was merely a general feeling that in a certain 
particular situation a certain line of conduct should be 
followed. If, in that situation, some individual acted 
otherwise than was customary, the disapprobation of 
the community was visited upon him. 

In ancient times, in England, one man generally 
owned a very large tract of land upon which he had a 
great many tenants. It was the custom for a certain 
portion of this land to be set apart for a common pas- 
turage for the cattle of all the tenants. Suppose, after 
several generations, the new owner of the land at- 
tempted to abolish this right of pasturage. He would 
meet with a great deal of opposition, even if there 
were no law to prevent him from doing as he chose. 
Once accepted as the guiding rule of men's actions, 
and after courts were established for the purpose of 
enforcing justice between individuals, these customs 
were recognized as binding laws. It then became 
necessary to discriminate between customs which had 
been in existence so long as to become laws, and cus- 
toms which had not yet become firmly established, and 
therefore not binding upon any one. To make use of 
a quaint expression which we often find among old 
English writers, if a custom had existed " from a time 
whereof the memory of man runneth not to the con- 
trary," it became a law. This meant that if in the 
memory of the oldest inhabitants there was no time 
when this custom had not been observed, it was deemed 
binding upon every one. 

12. First Digest of Customs. — As may readily be sur- 
mised, these customs were binding only in the com- 
munity in which they had been observed. A custom 



8 INTRODUCTORY 

might not extend over a whole kingdom, nor per- 
haps over a whole county, but might apply only to a 
certain neighborhood. The result of this was that a 
great number of customs, more or less conflicting with 
each other, grew up. This rendered the work of the 
judges doubly difficult, for they had to decide, first, 
whether the custom existed, and, secondly, whether it 
applied in the particular case before them. It will be 
remembered, from the study of English history, that at 
the time when King Egbert came to the throne of Kent 
the island was divided up into a number of small, but 
independent, kingdoms. The customs or usages in each 
one of these kingdoms necessarily differed, to quite a 
large extent, from each other. After King Egbert had, 
by many years of warfare, succeeded in uniting all Eng- 
land under one king, there was almost hopeless conflict 
of customs. 

When Alfred the Great came to the throne, he found 
time among all his other labors to have the customs 
or laws of all England harmonized, as far as possible, 
digested, and arranged in a great book in such a way 
that they could be conveniently referred to. For this 
work King Alfred the Great was called " Legum Con- 
ditor" — founder of the law. For the first time the 
whole body of the common law of England really had a 
recognized existence, and so the digest of King Alfred 
is the fountain head of that great body of law which 
now exists. 

13. How the Common Law has grown. — Since the time 
when King Alfred first gathered the laws together in 
one book, the common law has grown to its present 
vast proportions in the following way. Suppose a 
dispute arose between two individuals, whom we will 



THE GENERAL FIELD OF LAW 9 

call A and B, in a court of law at that time. The 
judges, after examining the records of the law in King 
Alfred's book, and after listening carefully to the facts 
of the case, which perhaps were previously decided by 
a jury, rendered a decision as to which party was in the 
right. In giving this decision they would state, also, 
their reasons. Suppose, now, a dispute between C and 
D arose at some later period about the same point. 
The judges, after listening to the facts, would search 
the records and find the decision of the previous case 
between A and B. They would then decide the case 
between C and D in the same waj^ When other cases 
involving the same or very similar questions arose 
thereafter, they would be controlled by the decisions 
in the cases between A and B and C and D. A judge 
is not at liberty to ignore the decisions of the courts 
which have gone before him, for those decisions are a 
part of the common law, and " no man is wiser than the 
law." The countless decisions of courts in England 
and in all the states in this country, the records of 
which fill thousands of printed volumes, are binding 
upon courts which decide cases at this day. Each 
new decision becomes a part of the common law, and 
is itself a precedent. 

Some writers declare that the common law itself 
has always existed, just as the law of gravitation has 
always existed, and all that judges do is to inves- 
tigate what the law is and apply it to individual 
cases. Really, however, the common law is built 
of nothing but these same judicial decisions. Theo- 
retically, the common law never changes any more 
than the law of gravitation changes. Really, it is 
changing every day. While, as we have indicated, the 



10 INTRODUCTORY 

decisions which have gone before are binding, yet as 
new situations arise, the varying conditions of the 
times appealing to the common sense of the judges, 
leads them, slowly, it is true, though surely, to mould 
the common law into conformity with the new con- 
ditions. If this were not so the common law could 
not have served the purpose which it has served in 
the history of the world. It continues to grow, and, 
gradually, with beautiful adaptability, changes to meet 
advancing needs. 

14. Authority of Judicial Decisions not Absolute. — 
We do not mean to say that a judicial decision cannot 
be departed from under any circumstances. If a line 
of judicial decisions has decided a question in a par- 
ticular way for a number of 3^ears, and public policy 
demands an absolute change, sometimes it is made by 
the courts of common law themselves. It is not often, 
however, that a common law court has the courage 
flatly to disregard foregoing decisions. The judges 
usually say that the remedy in such a case lies with 
the legislature. If the common law in some particular 
point is not consistent with the advancement of civili- 
zation, the legislature will step in and absolutely 
change it. Again, when we say that a judicial deci- 
sion is a precedent, understood in this limited sense, 
we do not mean that it is binding upon all common 
law courts, wherever situated, but it is binding only 
upon the courts of the jurisdiction in which the decision 
was rendered. English decisions bind English courts; 
New York decisions bind New York courts, etc. 

There are in every state courts of first resort and 
courts of final resort. If A and B have a lawsuit, 
their case is first decided in a court of first resort. 



THE GENERAL FIELD OF LAW 11 

These courts have different names in various states. 
Sometimes they are called Common Pleas Courts, some- 
times Circuit Courts, sometimes they go by other names. 
If one of the parties to a lawsuit is dissatisfied with 
the decision or verdict in the court of first resort, he 
may appeal to the court of final resort. This is usually 
called the Supreme Court of the state. A decision 
when rendered there is final, unless there is a constitu- 
tional question involved, which will warrant taking the 
case to the Supreme Court of the United States. The 
decision there is absolutely final, and if it is in con- 
flict with the decision of the state Supreme Court or 
with that of a court of first resort, the decision of the 
Supreme Court of the United States will, of course, 
prevail. 



CHAPTER II 

DIVISIONS OF MUNICIPAL LAW 

1. Classification of Municipal Law with Respect to its 
Objects. — Now, having seen, to some extent, how the 
law is formed, we will devote our attention to an 
investigation of its objects. These are twofold: the 
protection of the rights of individuals, and redress 
for wrongs which have been inflicted upon them. 
Therefore, if we classify the law with respect to its 
objects, we may distinguish two general divisions: 
First, that law which defines the rights which men 
possess and explains what constitutes infringement 
upon those rights, which we call "Substantive Law"; 
Second, that law which furnishes the machinery by 
which criminals are punished, and wrongs redressed, 
and which we call "Remedial Law." 

2. Substantive Law ; Rights of Persons. — In discuss- 
ing substantive law we will consider it in two divi- 
sions. The first relates to "Rights" and the second 
relates to "Wrongs." By "Rights," in this sense, we 
mean legal rights, rights which the law recognizes 
and will protect; and by "Wrongs " we mean wrongs 
which are recognized to be such by the law and for 
\vhich the law offers a redress. Following the classi- 
fication used by Blackstone, Rights may be subdivided 
into the " Rights of Persons " and the " Rights of 
Things." The "Rights of Persons" is that branch 

12 



DIVISIONS OF MUNICIPAL LAW 13 

of substantive law which deals with the rights which 
are annexed to the persons of men, as distinguished 
from those which affect property alone. These include 
the rights which every man has to enjoy personal 
security, personal liberty, and private property. It 
also defines the various rights and liabilities arising 
from the relation of Master and Servant, Husband and 
Wife, Guardian and Ward, Parent and Child, etc. 
This branch of law deals not only with individual per- 
sons, but with the liabilities and privileges of corpora- 
tions as well. 

3. The Rights of Things. — The " Rights of Things " 
is that branch of substantive law which deals with 
the acquisition and ownership of real and personal 
property, together with the annexed rights and liabili- 
ties. The subjects treated in this book belong, for the 
most part, to this division of substantive law. 

4. Public Wrongs. — Wrongs, which you will remem- 
ber as the second general division of substantive law, 
are of two kinds: public wrongs and private wrongs. 
Public wrongs are those committed against the whole 
community, as distinguished from wrongs which harm 
only certain individuals. Of such a nature is any act 
which disturbs the peace of the commonwealth or is 
a menace- to the security and general welfare of the 
people at large. All such acts are called crimes or 
misdemeanors, according to the magnitude of the 
offence, and are punished by public authority. 

5. Private Wrongs. — Private wrongs are not of them- 
selves dangerous to the community, but inflict loss 
upon one or more individuals. They are known as 
torts. Among the most common of such wrongs are 
cases where one person injures another by means of 



14 INTEODUCTORY 

some careless or negligent action. The one who com- 
mits a private wrong must make restitution to the one 
upon whom he has inflicted the loss. He may be com- 
pelled to do so by the injured party, who resorts to a 
suit at law for that purpose. 

6. Remedial Law ; Common Law Courts. — The second 
great division of municipal law, which we have called 
"Remedial Law," deals with the organization and com- 
position of courts and the manner in which one may 
enforce his claims therein. It is not our purpose to 
go into an extensive description of the courts or the 
manner of suing in them ; but it should be pointed out 
that there are two great systems of justice which are 
administered in this country. The courts of common 
law we have already referred to. They were the 
earliest courts organized in England, and were trans- 
planted to this country when our ancestors came over 
to make this their new home. These courts are gov- 
erned by common law rules and are strictly bound by 
precedent, as has already been explained. 

7. Courts of Equity. — There is, also, a second system 
which has developed in England and in the United 
States. A great many years ago it became evident 
that the common law did not offer ample remedies for 
all the wrongs which were inflicted upon individuals. 
The common law could punish a man for not carrying 
out a contract which he had made, and could compen- 
sate the other party to the contract by decreeing the 
payment of a sum of money by the person who had 
broken the agreement; but it had no power to make 
either or both parties carry out the agreement to the 
letter. The common law could force a man to pay any 
damages which he had inflicted upon another by reason 



DIVISIONS OF MUNICIPAL LAW 15 

of trespassing upon his land and tearing down his 
house; but it could not act upon the person of an 
intending wrong-doer and prevent him from doing the 
unlawful act, even though that act would result in 
an irreparable injury to another, who could not be 
compensated in money for the loss of his homestead. 
These are two illustrations of cases in which the 
common law failed to do justice, by reason of the rigid 
rules under which the courts had administered it for so 
mau}^ years. 

In order to meet this need the system of equity courts 
was invented and gradually grew up in England. A 
court of equity differs from a court of law, so called, 
first, in that it offers what are known as " Extraordinary 
Remedies," namely, remedies not recognized by the 
common law; and second, in that it is not bound by 
iron-clad rules when it is seeking to administer justice. 
These courts of equity, under various names, were 
transplanted to this countr3\ In some states the courts 
of common law administer both common law and equity ; 
in others there are still the two distinct courts ; as we 
proceed, we shall understand more clearly the difference 
between legal and equitable remedies. 

8. Development of Various Phases of Law relating to 
Property. — Having thus taken a rapid glance over the 
whole field covered by municipal law, we return for a 
more careful consideration of the "Rights of Things." 
The first branch of the law to attain form was that 
which related to land. This was very natural, since in 
ancient times land was the principal and almost the 
only property of value. As the community grew older, 
however, and other means of livelihood besides the till- 
ing of soil came to be largely followed, new branches 



16 INTRODUCTORY 

of law were developed to govern and regulate men's 
actions toward each other in these new relations. The 
acquisition and ownership of movable property gave 
rise to the law of personal property. As men began 
to engage in trade, they formed agreements with one 
another to do or not to do specified things. The neces- 
sity of holding each other to their bargains gave rise 
to the law of contracts. When commerce became more 
extensive, so that men often wished to deal with others 
in foreign lands, the law of agency became a necessity. 
To facilitate freedom of exchange, negotiable paper 
came into use, together with the rules governing its 
transfer from hand to hand. In more recent times the 
law relating to corporations has become of vastly 
greater relative importance than formerly, on account 
of the continued multiplication of that form of business 
association. Without going further into the subdivi- 
sions of the law relating to property, it can readily be 
seen why they have developed as the needs of the 
community called them forth. 



PAET II 

CONTRACTS 



SECTION I 
FOEMATION OF CONTRACTS 



CHAPTER I 

NATURE OE THE CONTRACTUAL RELATION 

1. Definition. — We are to discuss in this book the 
law relating to the more common business transactions, 
and more particularly the law of contract in its vari- 
ous phases. We naturally think of a contract as being 
an agreement between two or more persons. Many 
authors so describe it. This definition, however, does 
not accurately define. An agreement between two or 
more parties may create a contract, but the contract 
itself is something more — it is a legal relation between 
the parties. This legal relation confers rights and 
liabilities upon both. If you have agreed to sell one 
hundred bushels of wheat to B, and he has agreed to 
buy, each of you has certain rights over the other. 
You have a right to force B to accept and pay for the 
grain ; he has the right to have you furnish it to him 
upon payment of the price agreed upon. 

17 



18 CONTRACTS 

2. Why Contract and Agreement are not the Same. — 

It is this relation between the parties which is really 
what we mean when we use the word "contract." As 
we have pointed out, the agreement may operate to 
create the relation, but is not itself a contract. 

The proof of this lies in two facts. First, it is possible 
to make a contract without an agreement. Suppose 
I agree to sell you my brown horse for one hundred 
dollars — I really mean my black horse, but you accept 
the offer of the brown horse as I make it. Is there a 
contract ? According to some very eminent authorities, 
there is. If this be true, then, you have a contract 
founded, not upon an actual agreement, or, as it is 
called, a meeting of the minds of the two parties, but 
founded upon the words which passed between them. 
Second, all agreements are not contracts. If you make 
an agreement to dine with a friend there is an agree- 
ment, but no contract. There is no contract because 
the agreement was not intended to create legal rela- 
tions. A mere social engagement is not an agreement 
upon which the law will found a contract. 

From these illustrations it can be understood why it 
is incorrect to say a contract is an agreement. At 
the same time, it may simplify matters somewhat to 
use the more common phraseology and define a contract 
to be an agreement. When we say that, however, we 
may add that the agreement must be one which is 
enforceable at the law or else it cannot be a contract. 
There are a number of things besides the agreement 
which we must take into consideration before we can 
say that a contract exists. These will be explained 
when we take up the discussion of the essential ele- 
ments of a contract in the next chapter. 



CHAPTER II 

CAPACITY O'F THE PAKTIES 

1. Essential Elements of a Valid Contract. — In order 
that the agreement may create a contract enforceable at 
the law, there must be present the following essential 
elements : (1) The parties must be capable of making 
a contract. (2) There must be a definite expression of 
agreement between them, usually consisting of an offer 
made by one and accepted by the other. (3) There 
must be what is known as a " consideration " for the 
contract, i.e. some benefit must have been given to the 
party making the promise, or some disadvantage must 
have been suffered by the other, or else the agreement 
must be expressed in a particular form, known as a 
"contract under seal." (4) The expression of agree- 
ment must be genuine, i.e. it must not have been 
brought about by deception or by force. (5) The object 
contemplated by the parties must be legal. 

2. What is Meant by Capacity of the Parties. — It 
goes without saying that parties cannot contract unless 
they are legally capable of contracting. Generally 
speaking, everybody can contract, except those who for 
some reason are incapable of contracting, — those who 
are under some disability. The discussion of the 
capacity of the parties, therefore, resolves itself into a 
discussion of the various disabilities which may pre- 

19 



20 CONTKACTS 

vent an otherwise capable person from contracting. 
There are only two disabilities that it will be necessary 
to dwell upon at any length, namely, infancy and 
lunacy. According to the old common law, a married 
woman was unable to make a contract except in certain 
very limited situations ; but this disability, called the 
disability of "coverture," has been entirely removed in 
England and in most states in this country. 

3. Contracts of Infants. — An infant is any person 
under the legal age of majority; this age is usually 
twenty-one years for a male ; the rule is generally the 
same for females, though in some states they are of age 
at eighteen. No person is capable of making a binding 
contract until he has reached his majorit}^ But sup- 
pose an infant of the age of eighteen years attempts 
to make a contract and enters into an agreement which, 
if made by a person of full age, would create a legal 
obligation. That contract, if we may so call it, will 
remain in a state of suspense until the infant becomes 
of age. It may then become binding upon him or of 
no validity whatever, depending upon whether he 
expresses his willingness to go on with it or repudi- 
ates it altogether. Suppose you, being an infant, agree 
to purchase my house. After you become twenty-one 
years of age you come to me and tell me that you are 
of the same mind, and wish me to consider the matter 
as settled according to our original contract. You 
cannot thereafter draw back — you will be bound. 
But if, instead of agreeing to go on with your contract, 
you had told me you had changed your mind and had 
decided not to purchase, then the contract would be 
at an end, and I would be unable to force you to accept 
and pay for the house. 



CAPACITY OF THE PARTIES 21 

4. Infants may repudiate Contracts during Minority. — 

The question noAV arises whether the infant, suppos- 
ing he has made an agreement purporting to create a 
contract, is able to repudiate this contract before he 
becomes of age. It is clear that he cannot ratify it, for 
he did that impliedly when he first made it, and no sub- 
sequent ratification would be of any validity until the 
infant has become of age. But he may repudiate a 
contract during minority, so that it absolutely ceases 
to have any legal existence from that time. Suppose, 
while you are an infant, you purchase an automobile, 
agreeing to pay therefor one thousand dollars. Acci- 
dentally it runs into a river, and is entirely destroyed. 
You then conclude that you do not wish to buy it and 
you go to the seller and repudiate your bargain. He 
has no redress. Had you retained the automobile he 
could make you give it back to him, but now that it 
has been destroyed, without fault on your part, he 
loses everything unless you choose to pay, for your 
contract does not bind you. If you had destroyed 
the automobile wilfully or carelessly, he might have 
recovered damages against you for mistreating his 
property ; but he can recover nothing on account of the 
agreement which you made. 

5. Infants must Affirm or Repudiate upon Coming of 
Age. — When the infant becomes of age he must, 
within a reasonable time, choose which he will do, — 
ratify or disaffirm his contract. Whichever he does, he 
will then be bound accordingly. If the infant ratifies 
his contract by signifying his intention to abide by 
it, it is treated as being binding from the first day 
it was made. If he repudiates, it is considered as 
never having been of any validity. The ratification 



22 CONTRACTS 

or repudiation dates back to the time of the original 
agreement. 

6. How Eatification or Disaffirmance may be brought 
about. — This ratification or disaffirmance of the con- 
tract, whichever it may be, need not be brought about 
by express words. It is not necessary for the infant 
to say, "I repudiate," or "I ratify." Either rati- 
fication or disaffirmance may be brought about solely by 
actions. Suppose, while under age, you purchase X's 
house, move into the property, and treat it as your 
own. After you become of age you remain in posses- 
sion, continuing to live there for two years. You 
have, by your conduct, ratified the agreement and are 
bound to pay the price. On the other hand, if you 
move out soon after attaining your majority, cease to 
exercise any acts of ownership over the premises, re- 
fuse to pay X any more money, and demand the return 
of that which you have paid him, you have, by your 
conduct, disaffirmed. Few cases are so plain as this, 
and it is often very difficult to determine whether the 
acts do or do not amount to a ratification. 

It would be out of place in this elementary book to 
go more minutely into this particular phase of the 
question, but one rule may be pointed out as universally 
correct by which to interpret conduct in such cases. 
If the contract is executed, i.e. if the parties have 
performed their agreement, and, after reaching his 
majority, the infant does nothing to repudiate, but 
treats the contract as continuing, then, after the ex- 
piration of a reasonable time, it will be deemed to 
have been ratified. If, however, the contract be execu- 
tory, i.e. if neither party has performed (^e.g. if, in the 
illustration, though the contract had been made to sell 



CAPACITY OF THE PARTIES 23 

the house, possession had not been given), then a 
failure on the infant's part to change the existing con- 
dition of affairs would result in a repudiation. After 
the lapse of a reasonable time an executory contract is 
considered to be disaffirmed. 

7. Infant's Contracts which are Binding. — There are 
two exceptions to the rule that an infant's contracts 
are never binding. These exceptions are contracts for 
necessaries and marriage contracts. 

Contracts for necessaries are held binding for the 
protection and welfare of the infant. If he could not 
bind himself to purchase the necessities of life, he 
would be in danger of starvation in the midst of plenty. 
The only puzzling question which arises in such cases 
is. What are necessaries? That is decided by taking 
into consideration the wealth, position, mode of life, 
etc., of the infant. A horse and carriage has been 
decided to be a necessary for a wealthy infant, who had 
been ordered by his physician to ride for his health. 
Clothing, board and lodging, educational expenses, etc., 
are always necessaries. Surveying instruments for a 
student of civil engineering, microscopes for a student 
of biology, tools or instruments necessary for the practice 
of a profession in which an infant is engaged, would 
all be necessaries. On the other hand, " a wild animal 
or a steam roller " probably never would be. Between 
these two extremes there are many articles that come 
very close to the border line. A bicycle was formerly 
classed as a luxury. Now it has in some instances 
become a necessary. 

Not only must the article be one properly termed 
a necessary, but the amount expended must not be 
greater than could reasonably be considered indispen- 



24 CONTEACTS 

sable to the comfort of the infant. If he is very ex- 
travagant in dress, the salesman should be on his guard, 
for the " necessary " rule will not protect him. In one 
case where a young man had purchased seventeen pairs 
of trousers, the court came to the conclusion that such 
a large number at one time was not necessary, and his 
contract did not bind him. The clothing which would 
be necessary for a university student would not be con- 
sidered so for a trolley-car conductor. The court at- 
tempts to judge each case on its merits, and to adjudge 
those articles necessaries that can fairly be said to 
be essential to the comfort of the infant, taking into 
account all his external surroundings. No precise 
rules can be laid down. 

Marriage contracts of infants are held binding for 
reasons of public policy, provided the parties are old 
enough to know what they are doing. 

8. Contracts of Lunatics. — A lunatic in the eye of 
the law is a person of unsound mind, or, to use the legal 
phrase, one who is non compos mentis. Mere eccen- 
tricity must not be taken for insanity, nor should it be 
supposed that a mere temporary loss of reason will 
affect a contract made by a man during a lucid inter- 
val. As a general rule, the contracts of a lunatic may 
be declared invalid, if the other party to the contract 
dealt with him knowing him to be a lunatic, or after a 
commission had declared him to be insane. If, how- 
ever, a man contracts with another apparently sane, 
but who, unknown to him, is really insane, most courts 
will uphold the contract. The question is a disputed 
one, and there is no precise rule which can safely be 
laid down. A contract macfe by a lunatic for the neces- 
saries of life will bind him as in the case of an infant's 
contracts for necessaries. 



CAPACITY OF THE PARTIES 25 

9. Where One Party is Intoxicated. — Gross intoxica- 
tion is one form of lunacy. Very often a man will 
attempt to avoid a contract by stating that he was drunk 
at the time he made it. If he was so much under the 
influence of liquor as to be entirely insensible to what 
he was doing, and the other party knowingly took 
advantage of him, there is no contract. The courts, 
however, are very slow to let a man off from his con- 
tract upon this plea, and it must be very clear that he 
was entirely unable to transact business. 



CHAPTER III 

OFFER AND ACCEPTANCE 

1. Offer and Acceptance must be Definite. — Before the 
contract can be created there must be an expression 
of agreement between the contracting parties. As we 
tried to show in the preceding section, it is not always 
necessary that there be an actual agreement perhaps, 
but it is absolutely necessary that there should be a 
definite expression of agreement. This usually takes 
place by one party making an offer which the other party 
accepts. The simplest form of such an expression of 
agreement might be illustrated as follows: A says to 
B, "I will sell you my horse for one hundred dollars." 
B replies, "I accept." The contract is complete. If, 
however, either the offer or acceptance be indefinite 
there is no contract. If A had said to B, "I will 
sell you either of my horses for one hundred dollars," 
and B had replied, "I accept your offer," there would 
have been no contract because there was no definite 
acceptance. If B had said, " I accept, and choose the 
black horse," there would have been a contract, for in 
that case the expression of agreement would have been 
definite and complete. In all cases where the offer is 
in the alternative, the one to whom the offer is made 
must state which alternative he accepts. A wrote to 
B, saying, " We will ship you as many tons of pig-iron 

26 



OFFER AND ACCEPTANCE 27 

as you wish." In his letter he named two prices, one 
price if B should order the iron to be shipped by canal, 
and a higher price if he should order it to be shipped 
by river. B replied, "Ship me one thousand tons." 
There was no contract because B did not state which 
alternative he accepted. 

In the same way, if there be any ambiguity in the 
offer, even a definite acceptance will not create a con- 
tract. A wrote to B, " We have a few jars which we will 
be willing to sell," naming a price. B replied, "I ac- 
cept, and will take five hundred of them." There was 
no contract in that case because the offer was not defi- 
nite. A few jars may mean any number from five to five 
thousand. The court said A had not offered to sell any 
specific number, and as he did not have as many as five 
hundred, he was not liable for breach of contract. In all 
cases both the offer and the acceptance must be definite. 

2. Acceptance must be Absolute. — Not only must the 
offer and acceptance be definite, but the latter must be 
unconditional and identical with the terms of the offer. 
The one who makes the offer is called the offeror, and 
the one to whom the offer is made is called the offeree. 
We shall often refer to these two parties by these 
names. A offered B a farm for five thousand dollars. 
B replied, " I accept, subject to terms to be agreed upon 
between your attorney and mine." It was decided by 
the court that no contract had been made, because B's 
acceptance was coupled with a condition — it was not 
absolute. If the offeree undertakes to introduce new 
conditions into the contract not embodied in the offer, 
his acceptance is not absolute. A offered to buy B's 
farm for ten thousand dollars ; B declared he accepted 
the offer, and sent a contract to A for him to sign. 



28 CONTRACTS 

This contract stipulated that A should pay a deposit 
of ten per cent, of the purchase money, and that he 
should complete the payment of the remainder within 
a limited time. A refused to sign; B claimed that by 
so doing he had broken his contract, but the court said 
there was no contract, because B had attempted to 
introduce new terms into the agreement. 

3. Offer and Acceptance may take place by Words or 
Conduct. — Having ascertained the essential character- 
istics of offer and acceptance, we will next consider 
how this expression of agreement may be brought 
about. Is it necessary that in all cases the offeror 
should use the words "I offer," etc., and that the 
offeree should definitely say, "I accept"? Very few 
contracts are made in that manner. It is not neces- 
sary that any particular form of words be used. An 
offer may be made either by words or by acts. The 
merchant who exposes his goods for sale, by his conduct 
offers them to the public upon the payment of their 
price. If you go to the store and take the goods, you 
have by your act accepted the offer of the merchant, 
and the contract is complete. Street-car companies, by 
running their cars over the streets of a city, offer to 
carry any persons who choose to avail themselves of 
their services and to pay for them. If you board a car, 
you accept their offer and thereby agree to pay the fare.. 

Sometimes it is possible for a man to accept the offer 
of another without even doing an act. Suppose some 
one does a piece of work for you without your request, 
but you know he is doing it and offer no objection, 
and the circumstances being such that no reasonable 
man would think the work was being done for nothing. 
You, by your conduct, have accepted his offer to give 



OFFER AND ACCEPTANCE 29 

you his services in return for what they are reasonably 
worth, and you are bound accordingly. 

4. Conduct must be Unequivocal. — It must not be sup- 
posed, however, that in such cases a man may force his 
services upon another and drag him into a contract to 
which he really gave no consent. The conduct must be 
of such a nature that the court is perfectly well satisfied 
the parties knew wdiat they were doing, and impliedly 
assented to the closing of the bargain. A asked B, 
who was a contractor, to make an estimate as to the 
cost of altering and repairing certain offices. B did so, 
and sent the estimate to A. A made certain altera- 
tions in the specifications and sent the papers back to 
B, saying, " If these changes are satisfactory, you may 
begin work any time." Without saying anything 
further, B began work, purchasing lumber, materials, 
etc. Subsequently, A refused to carry out the terms 
of the paper. When B sued for damages, the court 
said there was no contract, because B had not definitely 
accepted A's proposition. This decision is a very 
close one. If A had clearly said, "I shall consider 
your beginning of the work as an acceptance of the 
offer," there would without doubt have been a contract, 
but, under the circumstances, the court thought A had 
intended B to answer him definitely whether he 
accepted the altered terms of the specifications. By 
saying B could begin any time, he merely meant that, 
after B had accepted the offer, he need not delay about 
commencing the work. 

5. Offer need not be Made to a Specific Person. — 
Having seen that the offer must be definite in its terms, 
the inquiry naturally arises. Must it be definite as to 
the person to whom it is made? Must the offer be 



30 CONTRACTS 

made to one specific individual, or may it be made to a 
number, any one of whom has the privilege of accept- 
ing? It goes without saying that the offer must be 
made by an ascertained person, but as long as it is 
accepted, sooner or later, by some particular individual, 
it is not necessary that the offer itself should have been 
specifically directed to any one individual. The offer 
may be made to the public. In the illustration of the 
street-car, the offer was made to all the people in the 
city. As soon as the intending passenger boards a car, 
he thereby notifies its officers that he accepts the offer, 
and completes the contract between himself and the 
street-car company. If you advertise in the papers, 
offering a reward for the return of a lost article, 
the man who brings back the lost article, by his con- 
duct, accepts the offer which you have made, and com- 
pletes the contract. In such cases it is not necessary 
that the one who accepts the offer should have notified 
the offeror that he is going to do so ; it is sufficient if 
he does some definite act, signifying that he does accept. 
A curious case which involves this point was decided 
in England a few years ago. A patent medicine com- 
pany, called the "Carbolic Smoke Ball Company," in 
advertising a patent medicine for the prevention of 
influenza, offered to give the sum of one hundred pounds 
to any person who contracted influenza immediately 
after taking their smoke balls three times daily for two 
weeks, as explained in the printed directions. An 
enterprising woman used the smoke balls as directed 
for two weeks, and then, accidentally or otherwise, 
contracted a severe cold and sued the company. The 
company objected that there was no contract, because 
this woman had not notified them of her acceptance of 



OFFER AND ACCEPTANCE 81 

their proposition; but the court refused to take this 
view of the matter, and permitted her to recover the 
one hundred pounds. They said the fulfilling of the 
conditions on her part, namely, the use of the smoke 
balls according to the directions, was a sufficient 
acceptance, and it was not necessary for her to send 
word to the company that she was going to try the effi- 
cacy of their medicine. 

6. Offer must be Consciously Accepted by an Ascertained 
Person. — We have seen that an offer may be made to 
the public, but it is clear that there can be no contract 
created until some specific individual has accepted the 
offer. The question might arise in this connection as 
to what is meant by acceptance. It is quite possible 
that some member of the public may do an act which in 
itself would constitute an acceptance of your offer had 
he been aware that you had made the offer; but would 
it, if, at the time he had made the contract, he was in 
ignorance that an offer had been made ? Suppose you 
offer ten dollars for the return of a lost dog. X finds 
the dog and returns him to you, but he does not know 
that you have offered ten dollars for the return of the 
animal until after he has delivered him over to you and 
has gone away. He subsequently sees the offer which 
you made, comes back to you, and demands the reward. 
Can he get it? There is some conflict of authority 
upon that point; but it now seems to be pretty well 
settled that he cannot. A man cannot be said to have 
accepted an offer of which he knew nothing. There is 
no contract until the offer has been consciously accepted 
by an ascertained person. 

7. Contract complete when Acceptance is Communicated. 
— Having seen that the offer must come to the knowl- 



32 CONTRACTS 

edge of the offeree, we next ask, When is the contract 
complete? You remember the illustration in which the 
contractor was told that if he was satisfied with certain 
changes made in the specifications, he could begin work 
at once ; he certainly accepted tjie offer, and yet there 
was no contract. Why? Because the acceptance was 
not communicated to the offeror. A man may make 
you an offer and you may mentally accept it, but no 
legal rights are created until you have communicated 
that intention to him. A's insurance policy on his 
barn had expired. He went to B, the agent of the 
company, and left the papers with him, telling him to 
renew the policy. By this act A made an offer. B 
said nothing, but merely accepted the papers. Before 
the new policy was made out, A's barn was destroyed 
by fire. The question then naturally arose whether 
the company was liable for the amount of the insur- 
ance. The court decided that it was not, because B 
had not definitely communicated to A his acceptance 
of the offer. The contract is complete when, and not 
until, the acceptance has been communicated either by 
words or by conduct. 

8. Acceptance Communicated when sent in the Manner 
Indicated by the Offeror. — Having seen that the accept- 
ance must be communicated, we next ask. When is it 
communicated? Is it communicated when the offeree 
has sent word to the offeror, even though the informa- 
tion does not reach the latter, or is it communicated 
only when the offeror actually knows that the accept- 
ance has been sent? That question has given rise to 
much litigation. As we shall see, in many cases 
neither party is at fault, and yet the communication 
never reaches the offeror. 



OFFER AND ACCEPTANCE 33 

The rule, which we shall understand better later on, 
is that if the offeree sends his acceptance in the manner 
indicated b}^ the offeror, at that moment the contract is 
complete, although the acceptance has not as yet 
actually reached the latter. A had negotiated for a 
policy of insurance upo» his barn. He wrote a letter 
accepting the offer which an insurance company had 
made to him, and enclosing a check in payment of the 
first premium, on July 10. The letter reached the 
office of the company on July 12. On the night of July 
11 the barn was burned down. Here it was very 
material whether the contract was closed when A mailed 
the check on the 10th or when the company received it 
on the 12th. If it was completed on the mailing of the 
check, then the company would be liable for the amount 
of the policy. If not until the 12th, the owner would 
have to bear the loss himself, because at that time 
there was no building to insure. The court decided 
that the mailing of the letter closed the contract, and 
the company was bound to pay the loss. 

9. Contract complete even when Letter of Acceptance is 
lost in the Mails. — If you strictly apply the rule which 
we have laid down, you will see that there is a perfect 
contract, even if the actual communication of the ac- 
ceptance never reaches the offeror. If it be literally 
true that the contract is complete when the acceptance 
has been sent in the manner in which the offeror indi- 
cates, then the actual arrival of the letter or telegram 
at its destination is immaterial. A wrote to B, offer- 
ing to sell him lumber at so much per thousand feet. 
B replied immediately, accepting the offer. B's letter 
of acceptance was lost in the mail, and A, not having 
received it, after a reasonable time, sold the lumber 



34 CONTRACTS 

to another party. A has, it would seem, every reason 
to believe that B has not accepted his offer, because 
he hears nothing from him. On the other hand, B has 
accepted, and is relying upon A to fulfil the contract. 
That looks like a hard case for some one, and so it is. 
It is one of those very close legal questions — so close 
that it would be decided differently if the case arose 
in different states. In most states the contract is com- 
plete upon the mailing of the letter, and A would have 
to respond in damages for having failed to fulfil it. 
In Massachusetts, however, the courts have decided 
that there is no contract until the letter of acceptance 
actually reaches the offeror. 

10. Contract probably Complete when Letter containing 
Offer is Delayed. — Sometimes it is not the letter of 
acceptance which is delayed, but the letter containing 
the offer. In such a case, supposing the offeree an- 
swers promptly according to the directions contained 
in the offer, would the contract bind the offeror? A 
wrote to B offering to sell him some wool, and direct- 
ing B to reply by return mail. A misdirected the 
letter so that B did not receive it until three days 
later than he otherwise would have done, but he then 
replied immediately as A had directed. The price of 
wool was fluctuating, so that A, after waiting until 
after the time when he expected to have received a 
reply, sold the wool to some one else. A does not 
seem to be in fault, for he has waited a reasonable time. 
B does not seem to be, for he replied at once upon 
receiving the letter. Who should suffer the loss? 
The court decided that there was a contract, and that 
A was liable in damages for its breach. 

Consider that decision for a moment. Do you think 



OFFER AND ACCEPTANCE 35 

it correct to say that neither one of the parties was at 
fault? It seems that B, upon observing the date of the 
letter to him, should have known it had been delayed, 
and that in all probability the wool had been disposed 
of. Suppose A is a dealer in perishable fruit, such as 
peaches, which will sometimes spoil in a day after 
picking, and which must be shipped at once. Suppose 
A, who lives in Delaware, offers the product of a day's 
picking to a dealer in Philadelphia, and requests an 
answer the same evening. His letter is delayed, and 
upon receiving no answer he sells the peaches else- 
where. Could the buyer accept the offer several days 
later, and hold A responsible ? It seems clear that he 
could not, and such is the law in cases like this, where 
the goods are perishable. 

11. No Contract if Acceptance is sent Contrary to In- 
structions. — We have seen that if the acceptance be sent 
according to the manner in which the offeror suggests, 
the risk of miscarriage is upon him, and the contract is 
complete as soon as the acceptance has been properly 
sent. But suppose the offeree disregards the directions 
of the offeror and sends his acceptance in another man- 
ner. In such a case as that the offeree has himself 
assumed the risk of miscarriage, and there is no con- 
tract until the knowledge of the acceptance actually 
comes to the offeror. A, who was a dealer in flour, 
sent a message to B by the man who drove his de- 
livery wagon, offering to purchase flour of him. He 
requested that B's answer be sent back to him by the 
wagon. B, thinking he could reach A sooner by mail, 
sent his answer in that way, accepting the offer. 
The wagon returned before the mail, and, upon receiv- 
ing no answer, A concluded B would not sell at the 



36 CONTEACTS 

figures he named, and made other arrangements. It 
is clear that there was no contract, for B deliberately- 
disregarded A's instructions. 

12. Offeror Assumes Risk of Miscarriage. — In some 
situations it must be a hardship whichever way you 
decide. Suppose you send me an oifer by your office 
boy, requesting an answer to be sent back in the same 
way. The boy is killed while on his way back with 
the acceptance. Neither of us is to blame, yet you 
would be bound. Or, again, to borrow an illustration 
from Sir William Anson, suppose you send a mes- 
senger across a lake conveying an oi^er to me. You 
request me to light a fire on a certain peak at 10 P.M. 
if I accept your offer. I light the fire ; there is a heavy 
fog over the lake so that you cannot see it. Who is 
to blame ? Nobody, and yet you are responsible. The 
reason why, in all these cases, the offeror is held 
responsible is because he is the one who voluntarily 
acts. He begins the proceeding and takes the risk 
that an acceptance communicated in the manner which 
he indicates will reach him. If it does not, he is 
bound, provided the offeree has done as he instructed 
him. We can thus lay down the general proposition 
that whenever the acceptance has been sent in the man- 
ner indicated by the offeror, it is considered to have 
been communicated, and the contract is closed. To 
this it may be added that where nothing is said about 
the manner of communication, it is understood that one 
of the common means is to be employed, e.g, the mail, 
telegraph, etc. This is the general rule, although it 
may be well to remember, especially if you live in 
Massachusetts, that the rule in that state is the other 
way. 



OFFER AND ACCEPTANCE 37 

13. Letter of Acceptance may be Revoked by Offeree. — 

One more situation may be referred to at this point 
with regard to the respective liability of the offeror 
and the offeree. When the offeree mails his letter of 
acceptance, we have said that the contract is complete. 
That is true; but suppose the offeree telegraphs a 
rejection of the offer, which rejection actually reaches 
the offeror before the letter of acceptance comes to him. 
Would there be a contract? There would not be. It 
may be asked what about the rule that the mailing 
of the letter of acceptance closes the contract? The 
answer is, that the mailing of the letter closes the con- 
tract so as to bind the offeror, but the offeree is not 
bound until the letter of acceptance actually comes to 
the knowledge of the offeror. 

14. The Offer may be Withdrawn at any Time Before 
Acceptance. — The next question which we will discuss 
is whether any rights are conferred upon the offeree by 
the making of the offer, but before it has been accepted. 
Suppose I offer to sell you my horse for one hundred 
dollars ; you ask for half an hour to think the matter 
over. At the end of that time you decide to buy the 
horse, and return to accept my offer. In the meantime 
another man has offered me one hundred and twenty- 
five dollars. As soon as you come in, and before you 
have a chance to accept the offer, I say, " I have changed 
my mind; I will not sell you my horse for one hundred 
dollars; I withdraw my offer." You reply: "You have 
offered him to me for one hundred dollars, and I accept. 
Here is your money. " Would there be a contract ? That 
would depend upon whether the fact that I made you an 
offer would give you an}' legal right over me. Is there 
any obligation resting upon either party merely by 



S8 Contracts 

virtue of the fact that one has made the other an offer? 
In this case there would not be a contract. An offer 
may be revoked at any time before acceptance. If you 
revoke an instant before acceptance, you are safe. 

But suppose, in the previous illustration, B goes off 
and does not return within the half hour, but stays 
away two or three hours, then returns and accepts before 
you have a chance to revoke. Would that be a con- 
tract? It would not be. If a definite time is stated in 
which the offer must be accepted, and it is not accepted 
within that time, it is said to lapse without any revo- 
cation on the part of the offeror. If the offer is made 
and no time is stated in which the acceptance must be 
made, it will lapse after a reasonable time has expired, 
and an acceptance thereafter will have no effect. An 
offer may also lapse by the death of either party at any 
time before acceptance. So we see that there are three 
ways in which an offer may be withdrawn before accept- 
ance : by revocation on the part of the offeror, or by 
the lapse of the offer through the expiration of a reason- 
able time or the time limited, or by the death of either 
party. 

15. Revocation Not Operative until it comes to the Actual 
Knowledge of tlie Offeree. — We have seen that the mail- 
ing of a letter of acceptance closes a contract, and that 
it is not necessary for the letter of acceptance actually 
to reach the offeror. We now come to the question, 
When does the revocation of an offer become operative ? 
Does it become operative at the moment the letter 
of revocation is mailed, or when the letter actually 
reaches the offeree. A, in Liverpool, wrote to B, in 
New York, making him an offer. B at once mailed a 
letter of acceptance. While the letter was still on the 



OFFER AND ACCEPTANCE 39 

way over, A cabled a withdrawal of the offer. Is there 
a contract? Clearly, yes, if we apply the principles we 
have learned. B's mailing of the acceptance closed the 
contract before the revocation was sent. 

Now suppose A writes to B on November 3 making 
him an offer, and the next day, November 4, repents of 
his action and mails a letter of revocation. B receives 
the offer on November 10, and mails his letter of 
acceptance on the same day, seven days after A had, by 
letter, revoked the offer. The next day, the 11th, B 
receives A's letter of revocation. Tliat state of facts 
brings up the question whether A's letter of revocation 
became operative the moment he mailed it? If so, then 
clearly there was no contract, because the letter of revo- 
cation was mailed on the 3rd, long prior to the acceptance. 
On the other hand, B's letter of acceptance was mailed 
before he knew of the revocation, and we ask, naturally, 
What about the rule that the mailing of the letter of 
acceptance closes the contract? If both are to be opera- 
tive on the day of mailing, we are bound to have a con- 
flict. The rule is, that the revocation is not operative 
until it has come to the knowledge of the offeree. So 
we see again that the offeree seems to have all the 
better of it, and, in a sense, this is just because he 
does not do the acting. The offeror is, as a rule, the 
one who is seeking the contract and, therefore, he 
assumes the risk. 

16. Offer may be Revoked by Conduct. — Just as a 
contract may be accepted without any express words of 
acceptance, but by conduct merely, so an offer may be 
revoked in the same manner. If you offer to sell me 
certain property, and before I accept you sell to some 
one else, and I am informed of that fact by you, the 



40 CONTRACTS 

offer is revoked just as much as if you had definitely 
said to me, "I withdraw my offer." In such cases, 
however, the notification of the action which results in 
the revocation of the offer must be sent to the offeree, 
or else he is entitled to treat the offer as still remaininor 
open. Suppose I offer to sell you my house for twenty 
thousand dollars and promise to hold the offer open 
until to-morrow at 4 p.m. At noon to-morrow X comes 
and offers me thirty thousand dollars, and I close with 
him at once. At 3 p.m. you accept my offer. Assum- 
ing that I have not notified you of the sale to X, it 
seems clear enough, on the principles we have just been 
discussing, that I will be held responsible; and yet, 
strange to say, one or two leading cases were decided 
the other way not so very long ago. The law, however, 
is now settled more in accordance with the general prin- 
ciple, that in such a case I would be liable because I did 
not communicate my revocation of the offer to you. It 
would seem, at first thought, that I would be bound to 
keep my offer open until 4 p.m., according to my prom- 
ise, or I would be liable in damages for failing to keep 
my agreement to hold the offer open until that time. 
This would not be true in the illustration we were 
considering, because I received no consideration for the 
promise to hold the offer open. It was a mere gratui- 
tous promise and, as we will learn in the next chapter, 
not binding upon me. I was perfectly at liberty to 
revoke ^t any time, provided I informed you of the 
fact. 

17. Knowledge of the Revocation should come from the 
Offeror. — In cases where the offeror has not distinctly 
stated that he withdraws his offer, but has done so by 
his conduct, the question sometimes arises whether it 



OFFER AND ACCEPTANCE 41 

is necessary that the offeree should have been informed 
of the withdrawal of the offer by the offeror himself, or 
whether it would not be a sufficient notification if some 
third party had actually informed him of the fact. 

You remember in the above illustration, that I 
offered to sell you a house, promising to hold my offer 
open until 4 p.m. the next day, but had sold at noon 
to X. Assume that you hear of the sale at 2 p.m. by a 
roundabout way, and come to me and accept at once in 
order that you may have a claim against me for breach 
of contract, as you know that I cannot now fulfil it. 
At first glance, one would say there is no contract ; but 
on second thought, you can see into what embarrassment 
such a conclusion would lead us. One would be obliged 
to act, perhaps to his own damage, upon no better 
information than mere rumor; it seems that a knowl- 
edge of the revocation of the offer must come directly 
from the offeror to be effective. It is probable that 
, in the illustration just given there would be a contract. 



CHAPTER IV 

FORM AND CONSIDERATION 

1. Necessity for Seal or Consideration; Classification of 
Contracts. — We have now brought the two parties 
together, and they have come to a definite expression 
of agreement ; yet something more is required before 
this agreement becomes a contract enforceable at the 
law. When w^e remember that the relation which 
is established between two persons when they enter 
into a contract confers rights and liabilities upon each 
of them, we can understand why the law requires some- 
thing more than a mere expression of agreement before 
it will fasten upon them these rights and liabilities. 
In order that the agreement may become a binding 
contract, something of value, called a "consideration," 
must have passed between the parties, as compensation 
for the promises contained in the contract, or else the 
agreement must have been expressed in a particular 
form, called a "contract under seal." 

If either of these two requisites has been complied 
with, then the agreement, which before was of no 
validity whatever, will create a binding contract. If 
the agreement be expressed by a sealed writing, it there- 
by becomes an enforceable contract, but it is absolutely 
necessary for all those contracts which are not under 
seal to be supported by a consideration. Consideration, 
as we shall explain more fully hereafter, consists of any 

42 



FORM AND CONSIDERATION 48 

legal benefit conferred upon one party by the other, on 
account of the contract into which he has entered, or of 
any injury suffered by the first party, on account of the 
promise which he has made. In view of what we 
have said, contracts naturally fall into two divisions. 
Formal contracts, which depend for their validity upon 
the form in which they are expressed, and simple con- 
tracts, which to be valid require the presence of con- 
sideration. 

2. Formal Contracts ; Contracts of Record. — There are 
two kinds of formal contracts which are valid without 
consideration. These two kinds are "contracts of 
record" and "contracts under seal." Contracts of 
record, so called, are really not contracts at all, and, 
strictly speaking, the name should not be applied to 
them. If I sue you in the courts, and judgment for 
ten thousand dollars is rendered in my favor, you 
owe me ten thousand dollars — not by virtue of any 
present contract, for none has been entered into, but 
merely by virtue of the fact that the court has adjudged 
in my favor. The record of this judgment, properly 
made out by the court officials, is known as a contract 
of record. It is enforceable by the court's order, and 
requires none of the usual characteristics of a contract to 
render it valid. Why it should be called a contract 
is not clear, for it is conceded that it is not a contract 
in the usual sense. There has been no meeting of the 
minds of the two parties. On the contrary, each was 
fighting the other. They were probably as far from 
agreement after the court's decision as they were before. 

3. Contracts under Seal ; What a Seal Is. — The true 
formal contract, and the only real agreement which is 
enforceable without the presence of consideration, is a 



44 CONTRACTS 

contract under seal. A contract under seal is one 
which has been reduced to writing, and which has 
been signed and sealed by the contracting party or 
parties. The one peculiar feature of it is that it must 
be sealed. When we speak of sealing a contract in this 
sense, w^e mean that the party who signs his name must 
place after his signature a seal. In ancient times this 
seal was required to be of wax, which was either tied 
to the paper with ribbons or fastened on by some ad- 
hesive substance. Such seals are still very common, 
and may be seen on papers which have been executed 
before a notary public, or on diplomas, or any papers 
issued by universities or colleges or other corporations. 

The old common-law rule prescribing a particular 
kind of seal has been abolished in most states in this 
country. If you use appropriate words, e.^., "witness 
my hand and seal this 23rd day of November, 1899," 
and after signing your name make a mark of almost any 
kind with the intention for it to represent a seal, you 
have sealed the paper sufficiently. In the state of 
Pennsylvania, a pen mark one-eighth of an inch long 
was decided by the court to be a sufficient sealing, when 
it appeared it had been put upon the paper for the pur- 
pose of representing a seal. It goes without saying 
that if the pen mark had been a mere chance stroke or 
flourish, it could not have constituted a seal. The rule 
of interpretation is to ascertain, if possible, the true 
intention of the parties. If they have placed appro- 
priate words on the paper, almost any legible mark 
w^hich is obviously intended to represent a seal is suf- 
ficient in a majority of the states, though in a few the 
old wax seal is still required. 

If it appear that the original intention to seal 



FORM AND CONSIDERATION 45 

the paper has not been fully carried out, then the 
contract is treated as a simple one. In one case slits 
had been made in the paper for the insertion of the 
ribbon with which to fasten the seal, but no seal had 
been affixed. In that case it seems clear that the 
parties had stopped before they had completed the seal- 
ing of the paper. Accord ingl}^ it was decided that 
the contract was a simple one. Upon most papers 
which are intended to be sealed a sufficient seal is 
already affixed, so that all the parties have to do is to 
sign their names. On such papers you will see a small 
round figure with the letters L. S. (^Locus Sigilli — the 
place of the seal) stamped in its centre. This figure 
is generally a sufficient seal. 

4. The Effect of Sealing a Contract. — Having seen 
how to make a sealed contract, the next question is. 
What is the effect of thus sealing it ? As has been 
explained, when the agreement is not under seal, it 
is necessary for some valuable consideration to have 
passed between the parties, or the contract will not be 
binding. But when a man seals a contract which he 
has made, it is not necessary that there shall be any 
consideration. When he affixes the seal he is supposed 
to add to the solemnity of his action. The theory is 
that by the act of sealing the paper he indicates that he 
has considered his action well and enters into it only 
after due deliberation and mature reflection. 

It may be thought after the explanation we have given 
of what constitutes a seal, that there is really little ad- 
ditional solemnity in the act of sealing an instrument. 
This is true, but the legal effect of the seal remains, 
although the formality formerly observed has been dis- 
pensed with. In earlier times a man's seal was more 



46 CONTRACTS 

distinctly his own than his signature; in fact, papers 
were sometimes not signed at all, but simply sealed with 
the seal of the party who was being bound. All of the 
edicts published by the king were sealed with the king's 
seal, and the keeper of that seal was a functionary of the 
greatest possible importance. To question the intention 
of agreements thus deliberately expressed was not to be 
thought of. In these days of practical simplicity these 
formalities have been gradually abandoned, but owing 
to the rigidity of the common-law rules the legal effect 
of the sealed instrument is still retained. Some authors 
explain the fact that a contract under seal is valid with- 
out consideration by saying that the seal itself gives 
validity to the contract; others say the seal raises a 
presumption that a consideration had been given by one 
party to the other, the court refusing to admit any evi- 
dence tending to contradict this presumption. The 
result, for our purposes, is about the same. A gratui- 
tous promise can be enforced if made under seal. 

5. Merger. — A contract under seal is, therefore, of 
a higher or more solemn order than a simple contract. 
Suppose A and B make a simple contract by which A 
agrees to sell B a house for so much money and at a 
certain time; at a later date, the same parties enter 
into an agreement to do the same thing, and exe- 
cute this agreement under seal. In such a case the 
simple contract disappears, and we have left only the 
sealed contract. This phenomenon is known as 
"merger." The lesser is said to merge into the 
greater. 

6. What Contracts must be made Under Seal; the Deed; 
Delivery in Escrow. — There are some kinds of instru- 
ments and contracts which are valid only if made under 



FORM AND CONSIDERATION 47 

seal. One of the most common of such instruments is 
the deed. A deed is an instrument the terms of 
which are written on paper or parchment, signed by 
the parties, sealed, and delivered to the person or per- 
sons upon whom it confers rights. The kind of deed 
which is perhaps most familiar is the deed for the con- 
veyance of land. All of the elements just mentioned 
are necessary in order to give it validity. Not only 
must it be signed and sealed, but it must also be deliv- 
ered before any rights are conferred by it. 

A, a man advanced in years, who desired to give his 
nephew B a farm upon the event of his marrying C, 
made out the deed and deposited it with X, his attorney, 
directing him to deliver it to B upon the day when he 
married C. This instrument conferred no rights upon 
B prior to the date of its delivery to him. In the mean- 
time it is said to be in escrow^ the term always used to 
describe a deed deposited with one person for future 
delivery to another. In the case we are discussing, A 
could have made out a second deed to some other party, 
and if he had delivered it prior to the date when the 
first deed was actually given to B, the latter would get 
nothing. The second deed would have been fully 
executed before the first one, for the reason that it was 
delivered first. 

7. Bond and Warrant of Attorney. — As has already 
been indicated, a gratuitous promise is binding only if 
made under seal. Accordingly, a promise of this nature 
must be so expressed. An example of a gratuitous 
promise is the bond. A bond is a sealed instrument, 
containing a promise on the part of the individual who 
executes it, to pay money. This promise to pay may 
be conditional or unconditional. The most common 



48 CONTRACTS 

bonds are those executed for the faithful performance 
of one's duties (as in the case of an officer who is 
required to handle money) or bonds providing for the 
payment of money which the promisor owes, with a 
penalty for non-payment at maturity. An example of 
the first would be a case where a man is appointed 
treasurer of a corporation. He would be required to 
file a bond, in which he agrees to pay to the corpora- 
tion a large sum of money, usually fixed at double the 
amount he is to handle. The bond, however, contains 
a provision that if he faithfully performs the duties of 
his office then the obligation is to become void. 

To illustrate the second kind of bond, suppose you 
owe me five hundred dollars which you are to pay me 
before January 1, 1901. You might file a bond with 
me, by which you obligate yourself to pay me one thou- 
sand dollars on January 1, 1901, but with a proviso that 
if before that day you have paid your debt, then the bond 
is to be void. There is usually attached to such a 
bond a paper called a warrant of attorney, by which the 
party signing the bond authorizes the other to enter 
judgment in the court against him for the fall amount 
as soon as he fails to perform his obligations, without 
the formality of a suit. This act of entering judgment 
creates a debt of record, and gives the party in whose 
favor the judgment is rendered the privilege of taking 
the other's property for the payment of his debt. 

Formerly, if you became liable on your bond, you 
would be compelled to pay its full amount even though 
it were double your real debt; but nowadays you are 
required only to pay the actual debt together with any 
loss the other party may have sustained by virtue of your 
delay. The purpose of giving a bond, you see, is to 



FORM AND CONSIDERATION 49 

guarantee the opposite party from loss, and the warrant 
of attorney is for the purpose of placing in his hands 
a means of prompt redress. These instruments give 
him much power over you. One should always think 
twice before giving a bond and warrant of attorney. 

In addition to these there are a great many contracts 
Avhich are usually sealed. It is always done when 
the parties wish to add unusual definiteness and pre- 
cision to the obligation, or where they are in doubt 
about the presence of consideration. 

8. Simple Contracts; Consideration Necessary. — Before 
taking up the discussion of what consideration, in 
fact, is, let it be emphasized that no simple contract 
is valid unless there be a consideration for the promise. 
Just why this is true it is hard to say. Nobody 
can answer that question with any degree of confidence. 
The law says the contract is worthless unless there 
is a consideration. Some writers think this rule 
is to prevent unjust bargains from being enforced in 
the courts. Others say the law will enforce any legal 
agreement if it is satisfied the parties are really agreed, 
and it demands the presence of consideration to sat- 
isfy it that the parties were in earnest when they made 
their bargain. Whatever the reason may be, a contract 
not under seal requires a consideration to make it 
enforceable. 

9. Consideration must Come from the Promisee. — Con- 
sideration is said to be "any benefit to the promisor or 
any detriment to the promisee." The promisor is the 
one who makes the promise, the promisee is the one to 
whom the promise is made. To constitute a legal con- 
sideration the benefit must come from the promisee. I 
might promise to make you a present of one hundred 



50 CONTRACTS 

dollars, and X might be so moved by my generosity 
as to give me a farm. That would no doubt be a 
benefit, but it certainly would not be a consideration, 
and would give you no right to sue me on my promise. 
Or suppose I promise you to give X one hundred dol- 
lars if you promise to help X through college. That 
gives X no right to sue me, because the consideration 
did not come from him, but from you. 

10. Legal Meaning of Consideration. — The exact 
meaning of the word "consideration" is very hard to 
define. It is easy to say that any benefit at all accruing 
to the promisor is a consideration, and likewise any det- 
riment or injury accruing to the promisee. But these 
words mean a great deal, and the question as to what is 
a legal benefit or a legal detriment is often extremely 
difficult to determine. It is scarcely possible in a brief 
treatment of the subject to explain the full significance 
of what the law means by "consideration," but we may 
at least point out some of the things which determine 
its presence or absence. The consideration may consist 
either of a present act, such as the payment of money, 
or a promise to do an act in the future, e.g.^ you promise 
to marry X ; X promises to marry you ; neither of you 
has done an act, and yai there is a contract — a promise 
is in itself a detriment in the eye of the law, because 
you thereby assume a legal responsibility. If the con- 
sideration be a present act, as mone}?" paid, it is said to 
be "executed," if it is a promise to do a future act, it is 
"executory." 

11. Consideration need not be Adequate to the Benefit 
Received. — At the beginning of the discussion of con- 
sideration we are met with the query. How much consid- 
eration is necessary to make a contract valid? Must it 



FORM AND CONSIDERATION 61 

be adequate to the benefit received ? If I agree to give 
you a farm worth thirty thousand dollars in considera- 
tion of your giving me one cent, there is a considera- 
tion, Would there be a contract? It seems absurd to 
call one cent a consideration for a farm, and yet we are 
strictly within the terms of our definition. We have 
a benefit to the promisor. The cent would be a legal 
consideration. The important question is not as to the 
amount given, but whether any real value is given. If 
there has been any legal benefit to one party, however 
small, or any legal harm to the other, however insignifi- 
cant, we have a consideration. 

B, for some reason not explained, wanted to weigh 
two large boilers which A owned. A told him he might 
do it if he would promise to return them in the same 
condition in which they were when he got them, to 
which B agreed. He took them all apart and, after 
weighing them, returned them to A without putting 
them together again. A sued B for breach of his con- 
tract to return the boilers in good condition. B said 
there was no consideration for his promise. He de- 
clared it was no benefit to him to weigh the boilers, and 
neither was it a detriment to A. The judges decided 
that it must have been some benefit to him or he would 
not have taken the trouble to weigh them. At any 
rate, they said, it was a detriment to A to part with 
possession of the boilers even for a moment. B might 
have made a very bad bargain. The cost of putting 
the boilers together might be very much more than the 
benefit he acquired from being allowed to weigh them, 
but that was his business. He had made his bed and 
must lie on it. The law will not come to the rescue 
of a man on the plea that he has made a bad bargain. 



52 CONTRACTS 

Suppose you hold a patent which purports to give 
you the exclusive right to manufacture and sell auto- 
mobiles in the United States, and I agree to buy all the 
right, title, and interest which you have in that inven- 
tion, together with all documents, patents, etc. For 
this I pay you a large sum of money. After I get the 
papers I find out that somebody else holds prior patents, 
and my papers are worthless. Notice just what I was 
buying. I was buying all the right which you had. 
Your rights have turned out to be very little or noth- 
ing, and yet as I got what I bargained for, ^.e., your 
right, I cannot escape from my bargain. I should have 
looked up the former patents before I bought. It is a 
safe rule always to think about a bargain before you close 
it. The law will not help you if you get any considera- 
tion at all. While in such cases as this the rule may 
seem a hardship to one party, a moment's reflection will 
show that a different rule would involve us in endless 
difficulty. It would be impossible to tell when the 
consideration is adequate. Some people might think it 
adequate, others might think it entirely inadequate. 
The law avoids this difficulty by refusing to consider 
that question. The only problem is whether any real 
value has changed hands. 

12. What Constitutes a Legal Benefit. — The words 
"benefit" and "detriment," as they are used in this 
connection, must be understood to mean legal benefit 
and legal detriment. It is quite possible that the 
gratification of some desire of yours may benefit you 
personally, when the law would not deem it to be a 
consideration. A's father, just before his death, ex- 
pressed a desire that a farm which by his will went 
to A, should be given to A's brother, B. A, desiring 



FORM AND CONSIDERATION 53 

to carry out his father's wishes, promised to convey to 
B. He afterward refused to carry out the agreement. 
When B sued him, he set up "no consideration" as a 
defence. The first question is. Would the gratification 
of A's desire to carry out his father's wishes (which he 
undoubtedly had at the time he made the promise) be 
a benefit to him ? Remembering that we are consider- 
ing A's feelings at the time he promised, we would 
unhesitatingly answer. Yes. But would there be a con- 
sideration? No, because the fulfilment of that wish 
of A's is not a thing of value such as the law can 
take cognizance of. Only a benefit that admits of some 
reasonably definite valuation can constitute a consid- 
eration. In another case A was continually complain- 
ing to his father that he had not received as many 
advantages as his brothers. His father promised to 
release him from a debt of one hundred dollars if he 
would quit complaining. A presumably quit complain- 
ing, for after the death of his father he claimed to have 
been released from the debt. The court said this con- 
sideration was of too vague and uncertain a character 
to be noticed by a court of law. 

13. What Constitutes a Legal Detriment. — We have 
seen that if the consideration consists of a benefit, it 
must be a benefit of some actual value to him who 
makes the promise. If it consists of a detriment which 
the party to whom the promise is made has suffered on 
account of the promise, this detriment must involve 
some actual loss to the promisee. If he has under- 
taken new responsibilities this is a legal detriment, 
and therefore a good consideration. 

In the illustration where A promised to convey a farm 
to B because his father wished him to do so, if B, in 



54 CONTRACTS 

consideration of A's promise, had agreed to pay a certain 
sum annually as rental, that promise would constitute 
a good consideration because it was clearly a detriment 
to the promisee, B, and was a detriment of actual, 
appreciable value. 

If the promisee surrenders any legal right, even for 
a short time, he has suffered a loss sufficient to consti- 
tute a consideration. A, who was somewhat dissipated, 
was promised one thousand dollars by his grandfather, 
to be paid him on his twenty-first birthday, if, during 
the time previous to that day, he would not use liquor 
or tobacco. A promised and kept his word. He had 
definitely surrendered a right. Although its exercise 
would, in fact, have been detrimental to him, the court 
said, legally speaking, he had given up a privilege, or 
a benefit, and the contract was good. In the same 
way, if you refrain, for ever so short a time, from prose- 
cuting your claims in the courts, you have thereby 
suffered a detriment. A was about to sue X. B asked 
him not to do so, and, in consideration of his promise 
to forbear suing, promised to pay him one hundred 
dollars. A forbore from suing, and then B refused to 
pay him the one hundred dollars. When A sued, B 
set up the defence of no consideration. A had given 
up his right to sue X at once. Giving up that right 
was a detriment to him, and therefore constituted a 
good consideration, and B had to pay. 

14. An Agreement to do an Impossible Thing is no Con- 
sideration. — We have seen that a consideration may 
consist of a promise to do an act. But if the act is 
impossible of performance, the promise is a nullity. 
Suppose I agree to give you one hundred dollars, in 
consideration of which you agree to drink up all 



FORM AND CONSIDERATION 55 

the water in the sea. There would be no contract, 
because the performance of the promise is mani- 
festly impossible, and, hence, the promisor was under 
no liability at all. He therefore never suffered any 
real detriment. It should, however, be noted that 
the impossibility contemplated by the law is physical, 
and not the mere pecuniary inability of the party to 
fulfil his agreement. 

15. It is no Consideration for a Man to do that Which 
lie is already Legally Bound to do. — In considering 
whether a real benefit has been conferred or a real 
detriment suffered, we must also take into account the 
existing liabilities of the parties. If one is already 
bound by contract to do some act, it is no legal benefit 
to another for him to perform that obligation, if the 
latter is, in any event, entitled to the performance. 
Suppose I owe you one hundred dollars, which for a 
long time I refuse to pay. At last I tell you I will 
pay you the full amount if you will promise to lend me 
your horse for a month. I pay over the money, and 
you refuse to let me have the horse. I sue, and you 
plead no consideration. Is it not a benefit to you for 
me to pay you the hundred dollars? No doubt this 
is correct in one sense, but as the hundred dollars 
really belonged to you before being paid over, are you 
legally benefited by receiving that which is your own? 
And as I owe the amount to you, am I legally harmed 
by paying that which does no more than fulfil my legal 
obligation? The answer to both inquiries is clear. 
A man cannot be said to be benefited by receiving 
that which is his own, or harmed by delivering over to 
another that which belongs to him. 

E'urthermore, if a man has contracted to do a certain 



56 CONTRACTS 

act, he cannot make the performance of it the considera- 
tion for a new promise. A hired a crew to go on a 
voyage from London to the Baltic Sea and back. Two 
of his crew deserted. He offered to divide the wages 
of the two deserters among the remaining saik")rs if they 
woukl sail the ship home. They accepted the offer. 
After the}' had returned, he refused to pay them, claim- 
ing there was no consideration for his promise. The 
court decided there was no bindino- contract because 
the seamen did no more than they had contracted to do 
in the first place, i.e. stay with the ship and sail her 
until she returned to the home port. 

On the same principle it is no consideration for a 
man to perform some duty which the law imposes upon 
him, even though he may not have made a contract to 
perform it. Suppose I am interested in the prosecu- 
tion of a criminal. You are summoned by the court 
as a witness. I promise you that if you will come, I 
will pay 3"ou for the time you lose from your business. 
Can you enforce that promise on my part? You can- 
not, because you were bound to come and testify any- 
way, and therefore your agreement to do so Avas no 
consideration for m}^ promise to pay. If, however, 
the person so bound performs duties other than those 
which he is by law compelled to perform, then he has 
given a consideration. A policeman who had performed 
extraordinary duties while assisting in the capture of 
a criminal for whose arrest a reward had been offered, 
claimed the reward. It was contended that he had done 
no more than the law required him to do, and was there- 
fore not entitled to receive it; but the court said he was, 
inasmuch as he had performed services over and above 
his regular duties. 



FORM AND CONSIDERATION 57 

16. It is no Consideration for a Man to Refrain from 
doing What he is by law Forbidden to do. — Not only is it 
no legal benefit for a man to perform his obligation ; 
it is also no le^'al harm for him to refrain from doinof 
something which he is forbidden to do by law. A 
declared his intention of assaulting X. B offered him 
ten dollars if he would relinquish that intention. He 
accepted the offer. There was clearly no consideration 
there, for A relinquished no right. He merely promised 
not to do what by law he was prohibited from doing. 
A promise to forbear from doing any act which is con- 
trary either to the common law or to statute law is a 
nullity. 

17. A Payment of a Part of a Debt is no Consideration 
for a Release of the Whole. — Sometimes it happens that 
a man will discharge a part of his legal obligation and 
receive from the other party a promise that no further 
payment will be demanded. The question then is, 
whether the payment of part of a debt is a sufficient 
consideration for the release of the whole. Suppose I 
owe you one hundred dollars, which I declare I am un- 
able to pay, but offer to give you seventy-five dollars 
at once if you will accept it in full discharge of the en- 
tire debt. You, thinking you will never get any more, 
accept. Subsequently, when I get hold of some more 
property, you sue me for the other twenty-five dollars. 
I rely upon your agreement not to demand the remain- 
der of my debt over and above the seventy-five dollars 
which I paid you. You contend there is no consid- 
eration for this agreement. Assuming that you had 
despaired of getting anything at all, the question might 
arise whether it is not a real benefit to you for me to 
pay you seventy-five dollars. We should have to 



58 CONTRACTS 

answer, No, for the same reason we gave in the pre- 
vious illustrations. You are legally entitled to one hun- 
dred dollars; it is no legal benefit for you to receive 
seventy-five dollars. If, however, the release of the 
remainder of the debt is made under seal, it will bind. 
This rests upon the rule above stated, that a gratuitous 
promise is binding if made under seal. 

18. Where the Debt is paid with Something Different 
from Money the Release is Binding. — In the illustration 
where the debtor paid seventy-five dollars and received 
a release for a debt of one hundred dollars, the payment 
of seventy-five dollars discharged only that amount of 
the debt; there was therefore no consideration at all 
for the release of the remaining twenty-five dollars. 
But the debtor may pay his debt with something dif- 
ferent from money ; if, in the above illustration, I offer 
you a horse worth seventy-five dollars in full satisfac- 
tion of my debt of one hundred dollars, and then you 
sue me for the remaining twenty-five dollars, you have 
received a consideration for your agreement not to claim 
the other twenty-five dollars. Your consideration is 
the horse. 

The difference is that in this case I give you a thing 
or chattel whose value is not exactly determinable. 
You have paid one hundred dollars for a horse worth 
seventy-five dollars, but that is your own affair. The 
law will not look to see whether you have made a bad 
bargain. As it is not possible to calculate exactly the 
value of the chattel delivered in payment of the debt, 
it might be that one of the parties would consider it 
to be worth the full amount; so in all such cases, the 
contract to release the remainder of the debt is held to 
be binding. Even where the chattel is sold for an 



FORM AND CONSIDERATION 59 

exorbitant price, that fact will not prevent the contract 
from being valid. But where the transaction is a purely 
cash one on both sides, there cannot be said to be any 
consideration for the release of the balance unpaid. 

19. Where a Number of the Creditors of a Debtor agree 
to accept Part of their Debts in Satisfaction of the Whole, 
the Agreement will Bind. — We have seen that where a 
single creditor accepts a portion of his debt in satisfac- 
tion of the whole, he is not prevented from claiming the 
remainder at some future time. The situation is dif- 
ferent, however, when several creditors mutually agree 
to release the debtor from all future claims in consid- 
eration of the payment by him of a certain percentage 
of all his debts. If A, B, and C are creditors of X, 
who is insolvent, and each one agrees to accept fifty 
cents for every dollar of his debt, and to release the 
debtor from all further claims, this agreement is called 
a composition of creditors, and is binding. 

It is perhaps rather difficult to see how this case dif- 
fers from the one given above, where a single creditor 
accepted seventy-five dollars in satisfaction of a debt 
of one hundred dollars. The argument that there is 
no consideration for the release of the remainder of the 
debt would apply here as between any single creditor 
and the debtor; yet the law says there is a considera- 
tion, because each creditor has received, in addition to 
his fifty cents on the dollar, a promise from each of the 
other creditors joining in the agreement, that he will 
claim nothing beyond that per cent. So each one has 
been benefited, because he has received that which he 
would not have had unless these mutual promises had 
been made. This reasoning is open to the objection 
that the consideration, namely, the mutual promises 



60 CONTRACTS 

of the creditors, did not come from the promisee, the 
debtor in this case. Theoretically, this would seem 
to be a fatal objection to the validity of the contract, 
although some writers think that the consideration does 
come from the debtor, inasmuch as he probably was 
instrumental in procuring the mutual promises of the 
creditors. This seems to be rather doubtful reason- 
ing. Whether or not it can be justified on principle, 
it is, nevertheless, true that a composition of creditors 
is held valid. 

20. An Acceptance of a Certain Sum as a Compromise of 
a Disputed Claim is a good Consideration. — Remembering 
that where a debtor pays a part of an ascertained debt, 
a single creditor's promise to release him from the re- 
mainder of it does not bind, suppose a case where the 
amount of the debt is in dispute between the parties. 
Suppose the creditor thinks it is one hundred dollars 
and the debtor thinks it is fifty dollars. In order to 
avoid the trouble and expense of a lawsuit, the creditor 
agrees to accept sixty dollars and give the debtor a re- 
ceipt in full, which he does. Afterwards, both parties 
discover that the real amount owed was one hundred 
dollars. The creditor then seeks to recover the remain- 
ing forty dollars. The debtor contends that he has been 
released from his obligation, by virtue of the creditor's 
promise not to demand more than the sixty dollars 
which was paid. The creditor contends that there was 
no consideration for his promise. The situation here 
differs somewhat from that previously considered, inas- 
much as the parties were in dispute over the amount of 
the claim. The agreement of the debtor to pay sixty 
dollars when he thought his claim amounted to only 
fifty dollars, and thus avoid litigation, which would be 



FORM AND CONSIDERATION 61 

troublesome and expensive to both parties, is sufficient 
consideration to support the creditor's promise not to 
demand the other forty doUars. A compromise of a 
disputed claim is always valid. The creditor accepts 
a definite for an indefinite amount. 

21. Real Test is whether any Actual Value has changed 
Hands. — After reading the preceding paragraphs, we 
can see that the real question in all these cases is 
whether any real value has passed between the parties. 
These illustrations do not pretend to show what par- 
ticular acts or promises will amount to a good consid- 
eration, for it would be impossible to enumerate them 
in a book of this character. They aim to present the 
essential features of what the law calls consideration. 
It is impossible to lay down any test by which you can 
always determine the presence or absence of it. We 
must judge each case by the peculiar circumstances 
which surround it. If the court is of the opinion that 
a real value has been given in return for the promise, 
or that an actual detriment has been suffered on account 
of it, the contract will be held binding. 

22. A Past Consideration is No Consideration at all. — 
Up to this point we have been seeking to throw light 
upon the essential nature of consideration. We now 
approach the question from a little different standpoint. 
We do not ask. What is consideration itself, but. When 
was it given to the promisor ? The point here insisted 
upon is that the consideration must have been given in 
view of, and on account of, the promise. It has been 
shown that the consideration may be either executed, 
that is, present; or executory, that is, future; but if 
the benefit consists of some value given in the past, 
before the promise was made, it is not a consideration, 



62 CONTRACTS 

because it could not have been given on account of 
the promise. 

A, who was a resident of Massachusetts, owned 
property situated in Texas. During a great freshet 
this property was in imminent danger of being de- 
stroyed. B, a friend of A's, spent much time and 
money in strengthening the dikes of the river, and 
through his efforts A's property was saved from destruc- 
tion. Shortly afterwards, A having appeared upon the 
scene, B gave him an itemized account of the expenses 
which he had incurred, and this amount A promised to 
pay. Subsequently he refused to carry out his agree- 
ment and B brought suit. A pleaded no consideration. 
At first thought one would say, " Clearly there is a con- 
sideration, for A has received a benefit, and certainly B 
has suffered a detriment." But consider the condition 
of affairs at the time the promise was made. B had 
already completely performed the services. He did 
nothing in consideration of A's promise. It was there- 
fore gratuitous and was not binding. While B's per- 
formance of these services for A created a motive for 
the promise, it did not constitute a consideration, 
because it was not done on account of, and in view of, 
the promise. The real question in this class of cases 
is whether the promisee has changed his position, that 
is, has given value or suffered loss on account of the 
promise of the other party. If he has not, then he 
cannot be said to have given consideration. 

A sold B a horse. After the money had been paid 
over, and B was about to lead the horse away, he asked 
A if he would warrant him to be sound. A replied 
that he would. The horse turned out to be unsound. 
B sued A on the contract of warranty. A said there 



FORM AND CONSIDERATION 63 

was no consideration. It was contended that the sale 
of the horse was a sufficient consideration for the war- 
ranty. This would have been true had the warranty 
been made before the bargain was consummated, but 
here the sale was completed before anything was said 
about the soundness of the animal. The warranty 
could not have been given in consideration of the sale, 
because the bargain was made and the parties fully 
bound before the question of the warranty was intro- 
duced. The consideration, therefore, being past, was 
in reality no consideration at all, and B could not 
recover for the breach of the warranty. 

In cases where services have been performed prior 
to the making of the promise, there is no consideration 
for the agreement to pay. A was running for Congress 
in New York. B, a political friend, labored assidu- 
ously in his behalf and spent money amounting to five 
thousand dollars for traveling expenses, etc. A was 
elected and, upon B's presentation to him of a bill for 
his expenses, promised to pay the amount. Upon the 
foregoing principles you can readily see that there was 
no consideration, and therefore no contract. 

23. A Past Consideration will support a Promise if it 
was performed at the Express or Implied Request of the 
Promisor. — A benefit which is conferred by one party 
upon another before the time when an agreement is 
entered into between them, and before there is any 
thought of such a contract, is, as we have seen, a mere 
gratuitous benefit. It cannot, therefore, ever consti- 
tute a consideration. But if, while no contract had 
been entered into prior to the giving of the considera- 
tion, the consideration had been conferred upon the 
one party by the other at his request, the case would 



64 CONTRACTS 

differ somewhat from those we have been considering. 
It does not seem just to excuse a man from a promise 
which he has made in consideration of some past 
benefit, when that benefit was conferred upon him at 
his own request. Consequently, a rule of law has 
developed which holds that if a past consideration has 
been given at the request of the promisor, it is a 
sufficient consideration to render a subsequent promise 
valid and binding. 

In a case which was decided in England in 1615, B, 
who had killed an Irish political leader and who had 
been indicted for murder, asked A to procure for him a 
pardon from the Crown. A traveled all over Great 
Britain at a great expense in performing this request, 
and finally succeeded in procuring the desired pardon. 
B then promised to reimburse A for his expenses. That 
which we have referred to as a past consideration may 
be defined to be a gratuitous act, performed prior to the 
making of the promise. But in this illustration could 
you say that A's efforts to do what B had expressly 
requested him to do were gratuitous acts ? By a gratui- 
tous act is meant an act done without expectation of 
reward, i.e.^ii I do some act for you without any request 
on your part, either express or implied, I do it gratui- 
tously, even though I may have a secret belief that you 
will pay me. In this case the act was not done gratui- 
tously because B had asked A to perform it, and, in 
contemplation of law, had at that time impliedly prom- 
ised to pay. His subsequent express promise was only 
putting into words what he had before agreed to do 
by implication. Therefore the promise was held bind- 
ing. 

Not only is a past consideration, perform.ed at the 



FORM AND CONSIDERATION 65 

express request of the promisor, a good consideration, 
but it is also sufficient to support a contract if it was 
performed at the implied request of the promisor. If 
you permit another to perform some service for you, 
under such circumstances that no reasonable man would 
think he was intending to do it for nothing, you will 
be compelled to pay him a proper amount if you sub- 
sequently promise to do so. By permitting him to do 
the work without protest on your part, you impliedly 
requested him to do it. 

24. A Promise to pay an Unenforceable Debt is Binding. — 
We now come to a class of cases involving a past con- 
sideration which differ slightly from those we have 
been discussing. There is a statute in every state in 
this country providing that if you do not prosecute 
your claims within a reasonable time, stated in the 
statute, you will not thereafter be permitted the aid of 
the courts in so doing. Now, suppose you owe me a 
debt which I am unable to collect, by virtue of the fact 
that a time longer than the statutory jDeriod has been 
allowed to expire. I come to you and request you to 
pay your debt, although I am aware that I cannot com- 
pel you to do so. You then promise to pay me. The 
question is. Can that promise be enforced? The au- 
thorities are uniform that it can. How do we escape 
the rule that where the consideration is past it will 
not support the promise? 

There are two explanations offered. The first is, 
that the promisor is morally bound to pay the debt, 
even though it be barred by the lapse of time, and the 
promise to do what one is morally bound to do, is based 
upon a sufficient consideration. The second explana- 
tion is, that a promise made under such circumstances 



66 CONTRACTS 

does not create a new obligation, but merely revives 
the old debt and so no new consideration is necessary. 
The old consideration revives together with the old 
debt. The latter is probably the true view. A moral 
obligation, as it is called, is not generally thought to 
be sufficient to support a promise. 

A promise to pay a debt which is unenforceable by 
virtue of any defence interposed by the policy of the 
law, is a binding promise. The original debt is revived 
in its full vigor. As illustrations may be mentioned a 
subsequent promise to pay a debt barred by the statute 
of limitations, which we have discussed ; a promise to 
pay a creditor the full amount of a debt from which 
the debtor has been discharged by bankruptcy; and a 
promise, after one becomes of age, to pay a debt con- 
tracted during infancy. 

25. A Moral Consideration is not Sufficient to bind a 
Contract. — We referred above to what is known as a 
moral consideration. If a man is morally, though not 
legally, bound to pay a sum of money, and promises to 
pay it, his promise is said to be based upon his moral 
obligation to do that which he has agreed to do. There 
has been much discussion whether a promise so made 
can be enforced. 

A, who was the guardian of B, expended a large 
sum of his own money in improving property belonging 
to B, the ward, so that he was able to sell it at a high 
figure. B subsequently promised to pay the amount, 
but afterwards refused to do so. A had voluntarily 
done B an act of kindness ; by the judicious expendi- 
ture of his own money he had saved a large sum to 
the ward without making the latter's estate legally 
liable to repay him. B was certainly bound by all the 



FORM AND CONSIDERATION 67 

principles of morality to repay such fidelity. And since 
he had promised to pay, it was very strongly argued 
that his promise, coupled with the moral obligation, 
should be enough to bind him. But it was decided in 
a case where the facts were similar to those we have 
given, that a moral consideration will not support a 
promise. As was pointed out by the court, a contrary 
doctrine would remove the necessity for any considera- 
tion at all, inasmuch as merely giving a promise creates 
a moral obligation to perform it. If the doctrine were 
admitted, every one would be compelled to perform 
every promise which he made, whether it were based 
upon a consideration or not. The foregoing view is, 
generally, the law on the subject, although some courts, 
particularly in the state of Pennsylvania, are still in- 
clined to doubt whether a moral consideration is not 
sufficient to bind the contract. 

26. Provisions of the Statute of Frauds. — Not only 
must all simple contracts be supported by a considera- 
tion, but some of them, in order to be valid, must also 
be expressed in writing. In England and in the 
United States, acts of legislature were passed a great 
many years ago which provide that certain classes of 
contracts shall be unenforceable in the courts unless 
they have been reduced to writing. These statutes 
were passed "for the prevention of frauds and per- 
juries." It is not necessary that the contract be writ- 
ten in any particular manner. All that the statutes 
mean is that a reasonably definite recital of its terms 
shall be so expressed. Whether the contract be written 
or not, it must be supported by a consideration. But 
assuming the contracts in themselves to be perfectly 
good, there are some to be hereafter referred to which 



68 CONTRACTS 

the policy of the law deems should be in writing to 
be enforced by the courts. These statutes enumerate 
certain contracts for which written evidence seems to 
be particularly desirable. 

27. What Contracts must be in Writing. — Without 
going minutely into the provisions of the statute of 
frauds, the most common contracts which must be 
expressed in writing will be briefly enumerated. If 
an executor or administrator (officers whose duties are 
to settle up estates of deceased persons) promises to 
pay out of his own pocket any loss accruing to the estate 
he is handling, he cannot be bound by his promise 
unless it be in writing. 

Whenever one man guarantees that another will pay 
his debts, or if he promises to answer for the default of 
another in case the latter embezzles money which he is 
handling, or in any case where one jjerson binds himself 
to be security for another, he cannot be held to his 
agreement unless he has bound himself in writing. A 
wished to borrow five hundred dollars from B. B re- 
fused to lend it to him unless C would guarantee that 
A would pay it. C promised that he would pay if A 
did not, but did not sign any written contract. When 
A defaulted, B was not allowed to hold C responsible. 

All agreements made in consideration of marriage 
must also be made in writing. A, who was about to 
marry B, agreed to settle lands upon her in considera- 
tion of the marriage. This agreement was not reduced 
to writing, and as A refused to perform, there was no 
way to force him to do so. 

We have seen that a deed for the conveyance of land 
must be under seal. A contract for the sale of land, 
or for the sale of any right in or concerning land, must 



FORM AND CONSIDERATION 69 

be in writing, although nothing but the deed of con- 
veyance need be under seal. By the word "land," in 
this connection, we mean not only the ground, but also 
all buildings erected thereon. 

Any agreement which provides for its future per- 
formance at a time more than one year after the date on 
which the contract is made, must be written, or it can- 
not be enforced. If A agrees to hire B, B's term of 
service to begin two years hence, neither party will 
be bound unless that agreement be written. 

In some states all contracts for the sale of goods 
above a certain amount, usually fixed at fifty dollars, 
must be in writing. This provision of the original 
statute of frauds in England has, however, not been 
adopted in all the states of this country. 

28. The Effect of Failure to Eeduce such a Contract to 
Writing. — You remember that a seal makes a contract 
good and enforceable in itself, whether there has been a 
consideration or not; conversely, if a gratuitous promise 
is made in writing and the parties neglect to affix the 
seal, the paper is of no value at all. But this is not 
true of the cases we are now considering. In the first 
place, the fact that the contract is in writing does not 
make it good — there must be a consideration ; and, in the 
second place, if the writing of the contract be omitted, 
that does not render it void. The contract itself is 
good, but you cannot enforce it in the courts. That 
sounds like an absurd statement, but there is a distinct 
difference between the two situations, as may be seen 
from a study of the following explanation. 

The law of the place where a contract is made gov- 
erns its validity. That is the rule everywhere. Now 
suppose a contract is made in France which provides 



70 CONTRACTS 

that B is to work for A for the space of five years from 
date. By the laws of France such a contract need not 
be written. Suppose the parties move to Pennsylvania 
in this country, B breaks his contract, and A sues him. 
This contract made in France is perfectly good accord- 
ing to the lex-loci contractus^ i.e. according to French 
law. Ought it not, therefore, to be enforced in the 
Pennsylvania courts? That brings up the question 
whether the Pennsylvania statute, providing that such 
contracts must be in writing, means that the contract 
is void per se, because it is not in writing, or merely 
that the court will not allow any evidence to prove its 
existence, except written evidence. If it means the 
former, — if the statute operates on the contract itself, 
— then A can recover, because, admittedly, his contract 
is valid by French law, and French and not Pennsyl- 
vania law governs its validity. But if the statute 
merely lays down a rule of evidence, and means that 
when any contract not to be performed within a year is 
to be proved, no Pennsylvania court shall receive any 
but written evidence, then A could not recover, be- 
cause, while his contract is admittedly valid, he can 
prove its terms in the court only by written evidence, 
and that he does not have. The latter is the correct 
view. In such a case A could not recover. So we see 
the effect of the statute of frauds is merely to lay down 
a rule of evidence for the courts to follow ; it does not 
touch the contract itself. 



CHAPTER V 

REALITY OF CONSENT 

1. Necessity for real Consent of the Parties. — We 
have discussed three of the five elements of contracts ; 
namely, the capacity of the parties, the necessity for 
offer and acceptance, and the necessity for the presence 
of either form or consideration. We now take up the 
fourth essential element, which is called "Reality of 
Consent." This chapter might well be included under 
the heading "Offer and Acceptance," were it not for 
the fact that it leads us into a discussion somewhat 
foreign to the elementary treatment of the formation of 
the contract. When we say there must be reality of 
consent, we mean the parties must have arrived, by offer 
and acceptance, at a real agreement. The law will hold 
people to a definite, legal obligation, called a contract, 
if they have, by words or conduct, so expressed them- 
selves as to create such a contract. 

But suppose the agreement concerned a ship which 
at that time was at the bottom of the sea, or suppose 
one party deceives the other by false statements. In 
the one case there could be no contract about the ship 
which had no existence ; in the other there ought not 
to be a contract, because the deceived person gave not 
a real, but only an apparent consent. Although the 
parties may seem to have agreed, their agreement may 
be unreal because there has been a mistake as to some 

71 



72 CONTRACTS 

important fact connected with the transaction; or an 
innocent misrepresentation about such a fact; or be- 
cause one party has wilfully deceived the other by 
making false statements to him ; or, finally, it may be 
unreal because force or undue influence has been used 
to compel one of the parties to express his consent. 
We must discover what is meant in the law by these 
terms, and what effect such conditions will have upon 
the contract. 

2. Mistake. — The first one of these elements of un- 
reality which we will discuss is mistake. When we 
speak of it in this sense, we mean a substantial error 
about some material fact connected with the transaction 
into which one or both of the parties have fallen. Mis- 
take must be distinguished from wilful deception. If 
the error has been brought about by the dishonesty or 
double dealing of either party, we have, not mistake, but 
misrepresentation or fraud, which we will discuss later. 

We must also distinguish mistake from an error 
of judgment as to the advantages to be derived from 
the contract. In many cases one of the parties to a 
contract wishes that he had never entered into it before 
he has finally fulfilled his obligations under it. He 
may perhaps have made a mistake as to the profits which 
he was likely to realize, but such a mistake will not re- 
lease him from his obligations. We must also exclude 
a mistake of law. Such an error is no ground for re- 
leasing either party from his agreement. It should be 
emphasized that in order to affect a contract the mistake 
must be about a positive fact. 

3. Mistake of Judgment distinguished from Mistake of 
Fact. — As has been indicated, an error in judgment is 
not a mistake which will in any way affect the validity 



REALITY OF CONSENT 73 

of the contract. Suppose you have learned a little 
about diamonds and, under the impression that you are 
an expert at selecting fine stones, you go into X's store 
to purchase a ring. In examining a tray of paste dia- 
monds you see among tliem a stone which you are con- 
vinced is a real diamond of tlie finest water. Under 
the belief that the stone is worth one hundred dollars, 
you offer X ten dollars for it, and he accepts. You sub- 
sequently find it to be worth fifty cents. You cannot 
draw back from your agreement to pay ten dollars for 
it. You trusted to your own judgment, and you were 
deceived. You merely cheated yourself. 

4. Mistake as to the Intention of the Opposite Party. — 
We have seen that no error in judgment will relieve 
you from the obligation of a contract into which you 
have entered. No matter how much you may have 
missed the true value of an article which you were buy- 
ing, if you bought it relying entirely upon your own 
judgment, you are bound. But, again, we must dis- 
tinguish such an error in judgment from a mistake as 
to the intention of the opposite party. In the last 
illustration, if you bought the stone relying entirely 
upon your own judgment as to its value, the fact that 
X may have known the stone not to be a diamond, and 
that he may have known that you thought it was, would 
not change the matter. As long as X did nothing to 
deceive you, we are not interested in what he thought, 
for you were not relying upon what he thought; you 
were relying upon what you yourself thought. But, 
on the other hand, if you buy the stone under the im- 
pression that X has warranted it to be a diamond; if 
you think he is selling it to you for a diamond, when 
iu reality he knows it is not a diamond and does not 



74 CONTRACTS 

intend you to think he is selling it as such, there you 
have made a real mistake — you think he is promising 
you a diamond when he is not. You have made a real 
mistake as to the intention of the opposite party — the 
state of his mind is a fact about which you have fallen 
into error and the contract is of no validity. 

A went to B to bu}^ oats. He wanted old oats, and 
thought the oats he was buying were old ; subsequently 
he found them to be new. He then refused to carry 
out the contract. The lower court said there was no 
contract if "A thought he was buying old oats." You 
can see that this was not a correct statement of the law 
from the illustrations we have had. His mistake was 
an error in judgment, for which he had only himself to 
blame. Accordingly, when the case was appealed to 
the upper court, they reversed the decision, saying 
there was a contract unless A thought B was promising 
him old oats, thus laying down the rule given above. 

5. Mistake as to the Existence of Subject-matter. — 
We will now discuss briefly some of the more common 
kinds of mistake, which are real mistakes of fact and 
which do affect the validity of the contract. Such a 
mistake often occurs about the existence of the subject- 
matter of the agreement. A sold B a cargo of corn 
which both parties supposed to be on board ship going 
from Salonica to England. As a matter of fact, the 
grain had become heated, and had been sold at Tunis 
for what it would bring. Here was a mistake as to the 
existence of the thing about which the agreement was 
made. Therefore there was no contract. A similar 
case occurred where the owner of an opera house agreed 
to lease it for a lecture ; at the time the agreement was 
made the opera house was not in existence, having been 



REALITY OF CONSENT 75 

burned down the night before. The contract, being 
founded upon mistake, was of no validity, and gave rise 
to no action of damages on the part of tlie lecturer on 
account of his inability to give the lecture and his loss 
of the expected admission receipts. 

6. Mistake as to the Identity of the Subject-matter. — 
The mistake into which the parties fall may be an error 
as to the identity, instead of as to the existence of the 
thing about which they are contracting; the same prin- 
ciples will apply in both cases. When two parties are 
endeavoring to agree about one thing, but, owing to a 
mistake of one or both of them, their words imply an 
agreement about something else, the mistake is just as 
fatal to the validity of the contract as the one we have 
previously described. A sold B a cargo of cotton, to 
arrive on the ship Peerless from Bombay. There were 
two ships of that name sailing from that port. A 
meant one, B meant the other. There was no contract 
because the parties made a mistake as to the identity 
of the thing about which they were contracting. 

7. Mistake as to the Identity of the Contracting Parties. — 
There may also be a mistake as to the identity of the 
persons with whom you are contracting. The consent 
of the parties, as expressed in the offer and acceptance, 
must be entirely free from all such errors, or it is not 
real consent. If you contract with one man, thinking 
he is some one else, you have given no real consent, 
because you did not intend to contract with that indi- 
vidual. X had been accustomed to supply B with 
ice. X sold his business to A, who opened the mail 
addressed to the firm and supplied B's orders. After B 
discovered with whom he was dealing, he refused to 
pay. It was decided that he was not obliged to do so. 



76 CONTRACTS 

There was no contract, because one party was mistaken 
as to the identity of the other. If, however, B had 
accepted the ice and used it, after knowing who had 
supplied it, he would have been compelled to pay for 
its value, although he would not under any circum- 
stances have been compelled to pay according to the 
contract, for there was no contract. He could be held 
liable only, if at all, upon another principle which we 
will not attempt to explain here, which is called the 
principle of "Quasi Contract." 

8. Mistake as to the Character of the Transaction. — 
Another class of mistakes is where one or both parties is 
in error as to the nature of the contract into which he is 
entering. If you sign a paper which you think is an 
indorsement of a candidate for public office, but which 
you subsequently discover to be a promissory note for a 
large sum of money, you have not really entered into 
any contract, because you never consented to sign a 
promissory note. If, however, you were careless in 
signing a paper which you had not read, and if the 
question as to who should be the loser arose between 
you and another party equally innocent, you would 
probably have to suffer. 

B, a very old man who was scarcely able to see, 
signed a paper which he was induced by another party 
to believe was a receipt. It was in reality a bill of 
exchange. This is what is known as "negotiable 
paper," and was transferred to a third party. A, who 
sued B. Here there was no fault in either of these two 
parties, A or B. There was a pure mistake, i.e. B had 
made an error, not induced by his own negligence, as 
to the character of the paper he was signing. A was 
not allowed to recover in this case, as B was held not 



REALITY OF CONSENT 77 

to have contracted to pay. There was a mistake as to 
the character of the transaction. If there had been the 
least evidence of negligence on the part of B, A would 
have been allowed to recover, but it was thought that 
under all the circumstances of the case B was not 
negligent in any degree. The only remedy which A 
would have would be a claim for, damages against the 
man who had deceived B. 

9. Effect of Mistake upon the Contract. — As we 
pointed out at the beginning of the subject of con- 
tracts, the essential elements of a contract must be 
present or no binding agreement is created. One of 
these essential ingredients is, that the consent expressed 
by offer and acceptance must be a real consent. If the 
expression of agreement be not the one which was 
intended by the parties, — that is, if one or both parties 
make a mistake as to some vital part of the transaction, — 
the whole contract falls to the ground for the want of 
one of these essential elements. Mistake renders a 
contract void, or it is, perhaps, more correct to say that 
there never was a contract, on account of the absence 
of one of the essential elements. 

10. Unrealities of Consent which do not absolutely Vitiate 
the Contract. — Mistake, however, is only one of the 
unrealities of consent. The other forms of unreality 
differ from it in a very essential particular. The agree- 
ment may be so unreal as utterly to fail to create a con- 
tract. This is the case if there has been a mistake. 
It is possible, however, that it may be a shade less 
unreal, in which case the contract does come into 
existence, but the unreality of agreement gives one 
party an opportunity to escape from his obligation if 
he desires to do so. We have seen that if A sells B a 



78 CONTRACTS 

ship-load of corn then at the bottom of the sea, there is 
no contract at all. But if A sells B a ship-load of corn 
which he says is first grade, when it is spoiled, there 
is a contract; although if A has told B a lie about the 
subject-matter, it seems reasonable to allow B to avoid 
the contract if he sees fit, whether or not B knew what 
he said to be false. In the one case he would be guilty 
of misrepresentation ; in the other of fraud. Likewise, 
if one man forces another to sign a paper at the point 
of a pistol, or if one party be unduly influenced by 
the other, the contract can be set aside. These are 
all examples of unreality of consent, which do not, 
by their presence, vitiate the contract in its inception, 
but give one party a loophole by which to escape after 
the contract is complete. 

11. Misrepresentation. — We will take up these vari- 
ous kinds of unreality and discuss each one separately, 
first considering what is known as "misrepresenta- 
tion." One naturally thinks of misrepresentation as 
describing a wilful falsehood, but the word is not so 
used in this connection. It is applied, for want of a 
better term, to misstatements of fact made by one party 
to the other without wrongful intent, e.g. I sell you a 
bar apparently of gold, which I really think to be gold, 
and so inform you. It turns out to be brass. There 
I was guilty of no wrong, and yet the contract may be 
set aside. The term " misrepresentation " is used to 
describe innocent misstatements as contrasted with 
"fraud," a term which is used exclusively to describe 
wilful and malicious or careless lying. 

12. The Question is whether the Misrepresentation is 
Part of the Contract. — It being conceded that the false 
statement was innocently made, the problem which the 



REALITY OP CONSENT 79 

courts have to solve is whether the representation was 
or was not of such a character as to give one party the 
right to rescind. The representation may be of such 
a nature as to form an integral term of the contract, or 
it may be too trivial to be considered a part of it, or again 
it may be an important representation but collateral to 
and not part of the agreement. If I sell you a stone 
which I honestly believe to be a diamond, and which 
I sell to you as a diamond, but which turns out to be 
glass, all would agree that the representation is a part 
of the contract. But if I sell you a horse, representing 
to you that his left hind foot is white when it is the 
right foot that is white, probably no man would seri- 
ously contend that the contract should be avoided for 
that reason. 

Between these two extreme cases we find many in- 
stances where it is very difficult indeed to tell whether 
or not the representation is intended to be an integral 
part of the contract. A sold hops to B. Before he 
closed the contract B inquired if any sulphur had been 
used in the cultivation or fertilization of the hops, as 
they would be worthless for his purposes if any had been 
so used. A replied that none had been used. It was 
afterwards discovered that A had, by way of experi- 
ment, used a small quantity of sulphur on a quarter of 
an acre of his hop field, he having entirely forgotten the 
circumstance. The sulphur-raised hops, being mingled 
with the rest, spoiled the whole for B's purposes. He 
repudiated the contract. The court decided he could 
do so, since he had contracted for hops untainted by 
sulphur, and failed to get what he bargained for. 

13. Representations which are Part of the Contract dis- 
tinguished from Warranties. — In this class of cases it is 



80 CONTRACTS 

often very difficult to ascertain whether the representa- 
tion made by one of the parties is intended to be a 
term of the contract or is in the nature of a collateral 
agreement termed a warranty. If I sell you a horse, 
and it is expressly stipulated that the contract of sale 
shall be void if the horse is not sound, the representa- 
tion that the horse is sound is one of the essential 
elements of the contract because it is involved in the 
consent of the parties. If, however, I make an abso- 
lute sale of the horse to you, but warrant him to be 
sound without providing that the contract may be 
rescinded, then if he is found to be unsound, you can- 
not repudiate your bargain. In the one case, the repre- 
sentation of the soundness is part of the contract; in 
the other there are two contracts, one providing for the 
sale of the horse, the other providing that he shall be 
sound. If the warranty of soundness be broken, you 
may sue me for damages for the breach of that contract 
of warranty, but the contract of sale remains untouched. 
This distinction is very important and should be care- 
fully noted. If, in the illustration given in the pre- 
ceding paragraph, it had been understood between the 
parties that the particular hops in question were sold by 
A to B, and that A guaranteed them to be free from 
sulphur, then B could not have repudiated his agree- 
ment. He could sue A for damages for the breach 
of the warranty, but the original contract would be 
undisturbed. 

14. Misrepresentation as to Time. — Very often a stipu- 
lation is made by one of the parties as to the time when 
the contract is to be performed. The question then 
arises whether the agreement by the opposite party to 
perform within the time stipulated is a part of the con- 



REALITY OF CONSENT 81 

tract itself, and therefore would give rise to a right to 
rescind it, or whether it is a mere collateral representa- 
tion which ma}^ as has just been explained, give rise 
to an action for damages, but will not defeat the con- 
tract itself. 

B agreed with A that his ship, which was "then in 
the port of Amsterdam," should proceed at once to 
Newport and take on a load of coal for A which was 
to be shipped to Hong Kong. This contract was made 
on October 19, 1860. B's ship was not, as he alleged, 
at that time in the port of Amsterdam, and did not 
reach there until October 23. A, to whom time was 
very important, then repudiated the bargain and made 
other arrangements. That brought up the question 
whether the representation as to time was an integral 
pai-t of the contract, or whether it was merely a promise 
made outside of it. In the former case A could repu- 
diate. In the latter he could not, although he would 
have a right to sue for the breach of the promise that 
the ship was at that time at Amsterdam. The court 
decided it was part of the contract that the ship was 
"then in the port of Amsterdam," and therefore A was 
allowed to repudiate. 

In another case nearly similar to this one, the opposite 
conclusion was reached. A engaged B, an actor, to 
serve through the season and to arrive four days before 
the first rehearsal. B did not arrive until two days 
before rehearsal. A endeavored to set aside the con- 
tract, but the court said this promise was not part of 
the contract itself. It was independent of it, and its 
breach gave A no right to rescind. 

In the one case, the representation that the ship was 
then in the port of Amsterdam was considered to be so 



82 CONTRACTS 

important that it became a term of the contract. If A 
had known that the ship was not in the port of Amster- 
dam at the time when he was negotiating with B, in all 
probability he never would have made the contract at 
all. On the other hand, in the latter illustration, the 
representation on the part of the actor that he would 
arrive four days before the first rehearsal was not con- 
sidered important enough to be deemed a term of the 
contract. In all probability, if B had stated that he 
could not arrive until two days before the rehearsal, he 
would have been emplo3^ed in spite of that fact. These 
two illustrations show how sometimes the element of 
time may be very important so that it becomes a term 
of the contract, and in other cases it is comparatively 
insignificant and is probably considered by the parties 
as a collateral stipulation. The mere fact that time is 
very important does not necessarily mean that it is a 
term of the contract, but it is very strong evidence 
that the parties intended it to be so. 

15. Misrepresentation as to the Subject-matter. — The 
most common kind of misrepresentation is that relating 
to the character of the thing about which the contract 
is made. It is very easy for a man who is anxious to 
sell property to misrepresent it in his efforts to induce 
the opposite party to purchase. It would be impossible 
within the scope of this book to attempt to enumerate 
the instances or classes of such misrepresentations. 
The principle underlying all of them is this: if the 
representation is of such a nature that the opposite 
party bought, relying upon it, and if it is considered 
by the court to be a term of the contract, then it 
will give the injured party a right to repudiate his 
bargain. 



REALITY OF CONSENT 83 

16. Expression of Opinion distinguished from Misrepre- 
sentation. — There are some representations which do 
not in any way vary the rights of the parties, among 
which are representations as to insignificant facts, and 
those which are mere expressions of opinion and do not 
purpoit to convey any information. A sold B a horse, 
declaring him to be a fine traveler; he was unable to 
travel at a greater speed than five miles an hour. B 
asked to have the contract set aside, but his request 
was refused. A's statement was not a representation 
of a fact. He might possibly have thought that the 
horse was a fine traveler, even though his speed was 
slow. 

In selling land an auctioneer declared it to be " very 
rich water meadow land." The land was not rich; 
there was practically no water on it, and it would re- 
quire a considerable stretch of imagination to describe 
it as meadow land, but, nevertheless, the court said 
this was a mere flourishing description — a puffing of 
the article to be sold. It amounted to a mere expres- 
sion of opinion on the part of the auctioneer, and did 
not vary the rights of the parties. 

The representation must always stand for something 
definite, or the opposite party cannot take advantage 
of its falsity either to escape from his contract or to 
recover damages. It is often hard to determine when 
the representation does stand' for a fact. A sold B a 
hotel. He said it was then leased to a "good tenant." 
The tenant was, in fact, a poor one, inasmuch as he 
had failed to pay the rent. It was contended that the 
expression "good tenant" was a mere expression of 
opinion on the part of A, and meant nothing more than 
a glowing description of the desirability of the purchase. 



84 CONTRACTS 

But the court held that "good tenant" means one who 
pays his rent, and refused to execute the contract. 

17. Misrepresentation by Failure to disclose Material 
Facts. — Not only may a contract be set aside for an 
actual misrepresentation about a material fact, but in 
some instances by a failure to disclose some hidden 
fact. There are some kinds of contracts in which one 
is legally bound to disclose all material information, 
and a failure to do so is in itself a misrepresentation. 
Perhaps the most common of these classes are contracts 
of insurance and for sales of land. As all who have 
been examined for life insurance know, the applicant 
is expected to tell all about his previous ailments. If 
you have a scrofulous tendency and fail to inform the 
examining physician, or if you have had a certain dis- 
ease which you forget to mention, you are liable to lose 
the benefits of the contract. You have been guilty of a 
misrepresentation. It is customary for insurance com- 
panies, however, to provide in their policies that, after 
a certain term of years, usually two or three, the validity 
of the contract shall not be questioned on account of 
misstatements contained in the application. You are 
bound in the same way to disclose all material facts in 
negotiating for marine and fire insurance. 

It is also your duty to describe correctly land which 
you are selling. If you make perfectly innocent mis- 
statements about it, or 'unthinkingly fail to give full 
information, the opposite party may abandon the con- 
tract. It .should be again emphasized that the misrepre- 
sentation or failure, whether active or passive, must 
relate to a fact which is material to the contract. 

18. Remedies of Injured Party. — As you have learned 
from the preceding pages, if the misrepresentation forms 



REALITY OF CONSENT 85 

a term of the contract, it gives the injured party a right to 
rescind. You have also learned that although the mis- 
representation concerns a material fact, if it is only 
collateral to the contract, and not a part of it, the 
injured party cannot rescind, although he may sue 
for damages. In the former case he has the option 
either to rescind the contract or to sue for damages, 
as he prefers. Should he choose the latter, he may 
recover the loss which he has suffered by reason of the 
falsity of the opposite party's statement. In cases 
where the misrepresentation is collateral to the con- 
tract, and this action is the only remedy of the in- 
jured party, the amount of damages to be recovered is 
the same. 

19. Fraud. — We now leave the discussion of misrep- 
resentations which have been made innocently, and 
come to those which have been made with an intent to 
deceive. Such misrepresentations constitute what is 
known as fraud. Fraud consists of a false statement 
about a material fact, made with a knowledge of its 
falsity, or with a reckless disregard of its truth, and 
for the purpose of inducing the other party to act upon 
it. As we shall see, when a man is guilty of fraud he is 
not only likelj^ to lose his contract, but he is also liable 
to be sued in an action of tort for the technical wrong 
called " deceit." In such a case he is responsible for the 
injury actually suffered by the opposite party on account 
of his false statement, and he may be also compelled to 
pay damages, imposed as a means of punishment. 

20. Statement must be about a Material Fact. — We will 
take up the essential elements of the wrong known as 
fraud, and will discuss them separately. The first is 
that which we have discussed in relation to the subject 



86 CONTRACTS 

of misrepresentation, namely, that the statement must 
be a false statement about a material fact. It must 
not relate to an insignificant matter of fact, nor to a 
matter of law, and it must be more than a mere expres- 
sion of opinion. I may say that a piece of land which 
I am attempting to sell to you is worth one hundred 
dollars an acre when it is worth only one dollar an 
acre ; but even though I know its real value, that state- 
ment will not constitute fraud, because I do not pretend 
to be stating a fact. If, however, I state that this land 
has been sold to me for one hundred dollars an acre 
and it has not, that, being a statement about a material 
fact, is sufficient to constitute fraud. 

21. Statement Must have been Made with Intent to 
Deceive. — The second essential element of fraud is 
that the false statement must have been made with the 
intention to deceive, that is, it must have been more 
than a gratuitous lie, told merely for the pleasure of 
telling it and for no ulterior purpose. This does not 
mean that the statement must have been made with the 
intention of deceiving the party to whom it was made, 
but it must have been made with the intention of deceiv- 
ing somebody. A sold B a gun, representing it to be safe 
and to have been made by a reputable firm. Both of his 
statements were false. The gun exploded and injured, 
not B, but his son, who was then using it. A con- 
tended that he could not be sued in deceit on account 
of an injury to the son, since he did not make the false 
statement to him ; but the court decided against him. 
He intended not only to deceive B, but also to deceive 
the son or any other person who was to use the gun. 

22. Party deceived must have acted on Account of the 
False Statement. — Even though the statement may have 



REALITY OF CONSENT 87 

been made with the intention of deceiving the opposite 
party, if he was not deceived, and therefore did not 
suffer damage on account of any deception, there can 
be no recovery of damages in an action for fraud. 
While the one making the false statement would, in 
such a case, be just as guilty as though the other had 
been actually deceived, yet the technical wrong of 
fraud is not complete until the opposite party has acted 
on account of the false statement and has by it been led 
into damage. A sold B a cannon. There was a hole 
in it which A concealed by filling with a metal plug. 
At the first discharge the cannon exploded. It appeared 
that B had never seen it before the explosion. He 
could not therefore have been deceived by A's action. 
This being true the court refused to hold A liable in 
deceit. 

23. Statement Must have been Known to be False or 
Must have been Recklessly Made. — The last essential 
element of fraud is the one which is most difficult to 
understand. The conception of fraud involves the idea 
of moral wrongdoing on the part of the guilty person. 
Assuming the statement to have been false, and the 
opposite party to have been deceived, yet if the one who 
made the statement made it innocently, he is not guilty 
of fraud. The question which is difficult to determine is 
when he is really innocent and when he either knew the 
statement to be false, or deliberately shut his eyes to 
facts which would have disclosed its falsity to him. In 
the latter case he is said to have been recklessly igno- 
rant, and is usually considered to be just as guilty as 
he is when he wilfully deceives. If the party knows 
the statement to be false, the solution is easy — he is 
guilty. But it is often very hard to determine whether 



88 CONTRACTS 

he has been recklessly ignorant or not. Even if he 
has been recklessly ignorant, but proves conclusively 
that he honestly believed his statement to be true; 
ought he to be liable for deceit? There has been a 
great deal of argument on this question, and even now 
there is not unanimity of opinion in the different 
courts. 

In the leading English case on this subject the direc- 
tors of a proposed street-railway company had issued a 
prospectus in which they declared they had obtained the 
right to run their cars on certain streets. This was 
false. The directors were sued by shareholders who 
had purchased stock on the faith of their false repre- 
sentations. The defendants succeeded in satisfying the 
jury that they were honest in their belief that they had 
the privileges which they claimed. It was very strongly 
argued that, as the directors ought to have known the 
truth, and had no reasonable grounds to believe they 
had been granted these privileges, they should be held 
responsible. But the court said it made no difference 
whether they had reasonable grounds for believing as 
they did or not; if they actually did believe what they 
said to be true, then they were not chargeable in deceit. 
The fact that they did or did not have reasonable 
grounds for their belief was declared to be valuable 
to aid the jury in determining whether the directors 
believed their own statements, but otherwise was 
thought not to be material. That is the English view. 

The American view seems to vary slightly from it. 
The American courts are inclined to say: If a man 
makes a declaration false in fact, he makes a statement 
which he does not know to be true ; and if he makes 
it without reasonable and probable grounds to believe 



REALITY OF CONSENT 89 

in it, then he is recklessly ignorant as to its truth or 
falsity, and should be held liable just as much as in 
cases where he wilfully lies. The latter view is the 
correct one. It works substantial justice in more cases 
than the other, for it is extremely difficult or impossible 
actually to determine the state of mind of the party 
charged with the fraud. As has been so often expressed 
by the courts, man's motives must be judged from his 
acts, God alone being capable of reading his mind; 
consequently, the American view, which assumes that 
a man is not honest in his statement if he makes it 
without any reasonable grounds for believing it to be 
true, is the better rule of the two. 

24. Remedies of the Injured Party. — It remains to 
consider the effect of fraud upon a contract. Just as 
misrepresentation, when it is a part of a contract, 
destroys its binding force, so will fraud render it 
voidable, ^.e. the deceived party may at his option 
carry out the contract and charge the other party for 
the loss he may have sustained, or he may repudiate 
it altogether and rely upon a suit for damages for re- 
dress. He must, however, be prompt in coming to his 
decision, and doing one thing or the other. If, after 
he is fully acquainted with all the circumstances of 
the fraud, he is satisfied to go on with the contract, and 
so informs the other party, the contract may be said to 
have been ratified, and may not thereafter be rescinded. 
If he decides to sue for damages, he may recover any 
loss which he may have sustained, provided it might 
reasonably be expected to result from the fraudulent 
statement. These are his remedies under the contract. 
If he does not wish to avail himself of either of them, 
he may, in an action of tort, recover damages not only 



90 CONTKACTS 

for the loss he has sustained, but also what are known 
as punitive damages, which are awarded, not only to 
compensate the injured party but also to punish the 
guilty one. 

25. Duress. — Another form of unreality of consent 
which sometimes renders a contract voidable is what 
is known as duress. Duress consists of any actual or 
threatened violence offered to a man, or to any member 
of his family, in order to force him to enter into a con- 
tract. If he does enter into an agreement under such 
circumstances, he is said to contract under duress, and 
he may avoid the contract so made if he desires to do 
so. It is very clear that there is in such a case no real 
consent. The will is overpowered by a fear of injury, 
just as in the case of fraud or misrepresentation the 
judgment is deceived. In both cases the consent is 
only nominal, not real. 

26. Undue Influence. — Very nearly akin to duress is 
undue influence. This consists of influences of various 
kinds brought to bear upon a man to make him do some- 
thing of which his better judgment disapproves. It is 
much harder to prove than duress, because it is more 
insidious. The most common instance is in the case 
of a testator making a will. While a will is not a con- 
tract, the principles relating to undue influence are the 
same as applied to both ; and cases where undue influ- 
ence is alleged as a means of attacking the validity of an 
instrument arise far more frequently in the case of wills 
than in the case of contracts. It frequently happens 
that some near relative or friend will so work upon the 
feelings of an old, and perhaps feeble man, as to induce 
him to make a will or sign a contract of which his 
sober judgment would not approve. The difficulty in 



REALITY OF CONSENT 91 

such cases is, first, to prove the influence ; and, second, 
to determine when proper influence ceases and undue 
influence begins. 

Undue influence is usually defined to be such as over- 
powers the volition, without convincing the judgment. 
As a general rule, the party seeking to set aside the 
instrument on the ground that one party to it was unduly 
influenced must allege and prove the undue influence. 
In certain classes of cases, however, the burden of proof 
is said to shift, and the duty of proving that there has 
been no undue influence falls upon the defendant. If 
a child makes a sale of land to his father for a very 
inadequate consideration and the transaction is at- 
tacked, the father would probably be called upon to 
show that the child had had independent advice and 
was not unduly influenced by him. The same rule 
holds true whenever the court thinks, from the nature 
of the transaction, that a presumption of undue influ- 
ence has arisen. Undue influence, like fraud and 
duress, renders a contract voidable at the instance of 
the injured party. 



CHAPTER VI 

LEGALITY OF OBJECT 

1. Necessity for Legality of Object. — All the elements 
of a contract thus far discussed may be present, — the 
parties may have been capable of contracting, they may 
have expressed their agreement in the proper form, a 
valid consideration may have been given, and the con- 
sent so expressed may have been a real consent, — yet 
the contract will not be good unless the objects contem- 
plated by it are legal. By this we mean that the purpose 
of the contract must be a proper and lawful one. In 
general, all contracts are deemed legal. Every one is at 
liberty to enter into an agreement with some one else, 
if he chooses to do so. Those contracts only are illegal 
which are forbidden by the law. Just as we discussed 
the incapacity rather than the capacity of the parties, 
so we must now discuss illegality instead of legality 
of the object, for illegal objects are far less numerous 
than those which are legal. The objects of a contract 
may be illegal because they are forbidden by statute 
law, or because they are contrary to the common law. 

2. Objects Forbidden by Statute. — Sometimes an act of 
legislature or an act of Congress forbids certain con- 
tracts to be made. We shall not attempt to name the 
various statutory prohibitions which have been imposed, 
as it would be quite impossible to do so. The sta^tute 
may forbid a certain class of contracts to be made, or it 

92 



LEGALITY OF OBJECT 93 

may declare that if made they shall be void, or it may 
impose a penalty upon all persons who enter into them. 
In the last case the contract itself is valid, although 
the parties who entered into it will be compelled to pay 
the penalty. But if the statute either forbids the con- 
tract to be made, or provides that it shall be void, no 
rights can be acquired under it. 

3. Effect of Illegality upon Collateral Transactions. — 
The reason for making a distinction between con- 
tracts which the statute declares to be void and those 
which it forbids, is the different effect upon other con- 
tracts growing out of them. A contract forbidden by 
a statute is not only void in itself, but it is so tainted 
with illegality that other contracts, perfectly innocent 
in themselves, may also be void if they are in any way 
connected with the forbidden contract. On the other 
hand, if the contract is merely declared to be void by 
the statute, it is not, strictly speaking, illegal. Other 
contracts growing out of it are not void simply because 
they have some connection with it. 

For instance, in England a statute has been passed 
which provides that wagering contracts shall be void. 
If A makes a bet with B, loses, and pays his bet with a 
promissory note for one hundred dollars, that promis- 
sory note would be valid, although it was given in 
payment of a debt arising from an illegal contract. 
But if the statute had forbidden any wagering con- 
tracts to be made, then the promissory note would be 
void as well as the contract itself. In some states in 
this country statutes have been passed which provide 
not only that wagering contracts shall be void, but 
that all contracts, like that mentioned, arising out of 
them shall be void also. In such a case, obviously, 



94 CONTRACTS 

neither of these contracts would have conferred any 
rights on any one. 

4. Objects contrary to the Common Law. — Not only 
may contracts be void because they violate a statutory 
provision, but they may also be void because they are 
contrary to the rules of common law. Any contract to 
commit a crime or to do a civil wrong is absolutely 
void. A hires B to commit murder. After the com- 
mission of the crime it is very clear that B can not 
claim his compensation from A in a court of law. The 
result will be the same if A has hired B to rob a house 
or to bribe, or to commit any offence which is recog- 
nized by the common law as a crime or misdemeanor. 

5. Agreements contrary to Public Policy; Immoral 
Ag^reements. — There is another class of contracts which 
are void because they are contrary to the common law, 
though their opposition to it is not nearly so easy to 
determine. This class embraces those contracts which 
are said to be contrary to "public policy." "Public 
policy" is a term which is extremely difficult to 
define. Anything which is detrimental to the public 
welfare is deemed contrary to public policy, and, as 
may readily be surmised, this term is extremely 
elastic and capable of innumerable interpretations. 
There are, however, several classes of agreements 
which are generally recognized as being contrary to 
public policy, and are void for that reason. Immoral 
agreements constitute one of these classes. No expla- 
nation is necessary to illustrate what is meant by this 
term, for the name explains itself. Any agreement 
which, though it does not contemplate a crime or mis- 
demeanor, has for its object a purpose generally recog- 
nized to be contrary to good morals, is void. 



LEGALITY OF OBJECT 95 

6. Ag^reements tending to defeat Justice. — There are 
some kinds of agreements winch have a tendency to 
defeat justice. Such agreements are contrary to public 
policy because they are said to "pervert the course of 
justice." If two men agree to refer all matters in dis- 
pute which may hereafter arise between them to arbi- 
trators to determine, instead of going to a court of 
law, such an agreement is void. It is void because 
it removes disputes arising between them from the 
proper place where such disputes should be deter- 
mined, that is, the courts, and takes them to a 
tribunal created by the parties themselves. Two parties 
may make a valid agreement to refer a particular dis- 
pute to arbitrators to decide, instead of going to law 
about it, and such an agreement will bind them so that 
neither can recover in a suit. But an agreement to 
refer all matters to arbitrators is considered to be con- 
trary to public policy because it "ousts " the jurisdic- 
tion of the courts. 

On the same principle, any agreement to conceal your 
knowledge of a crime which has been committed, or to 
secrete witnesses, or to prevent criminals from being 
brought to justice, or to do any act which in any way 
tends to hinder or delay the courts in their work in 
deciding litigation or in bringing criminals to justice, 
is void. 

7. Agreements tending to promote Litigation. — Any 
agreement which has for its object the promotion of 
litigation in the courts is void. The policy of the law 
is against allowing men to stir up trouble merely for 
the pleasure of having disputes. If a man has been 
injured, and is in good faith seeking redress, he will 
receive the assistance of all the machinery of justice. 



96 CONTRACTS 

But if he is attempting to arouse quarrels among his 
neighbors, either for the mere pleasure of doing it, or 
for the hope of ultimate gain to himself, he cannot 
invoke the assistance of the courts. 

If you have been injured through the carelessness of 
an engineer employed by a railroad company, you may 
sue the railroad and recover damages. But you cannot 
sell your right to sue to some one else. This may 
seem, in one sense, like a hardship, because very often 
poor people are injured who have no means with which 
to employ counsel to enforce their claims. But if it 
were permitted for one man to sell his bare right to sue 
to another, we should soon have speculators whose 
only business would be to go about the country ascer- 
taining who had been injured, buy their claims for small 
amounts, and then sue those who had been responsible 
for the injuries. This objection to the rule forbidding 
the sale or assignment of a right to sue is not so strong 
as formerly, since " contingent fees " are now sanc- 
tioned by the courts. A man without means who de- 
sires to sue for damages, on account of injuries which 
he has received, is permitted to make a contract with 
an attorney by which the latter is to receive a certain 
percentage of the amount recovered. This arrangement 
permits a poor man to employ the services of counsel 
when he has no money to pay his fee. 

It sometimes happens that property is sold which has 
been injured through the wrongdoing of some one else. 
If you are the owner of a valuable horse which has 
been injured by a wrongful act of X, and you sell a 
number of horses to me, among which is the injured one, 
I may sue X for the injury done to the horse which now 
belongs to me. You may sell to me a right to sue 



LEGALITY OF OBJECT 97 

under such circumstances. The distinction between 
this case and the other is that here you do not sell the 
mere right to sue, you sell the horse ; the right to sue 
goes with the purchase. As a general rule, any agree- 
ment which tends to promote litigation is void. 

8. Agreements in Restraint of Marriage. — Any agree- 
ment which tends to restrain the freedom of marriage 
is void. The policy of the law is in favor of marriage, 
and anything tending to prevent it is therefore con- 
trary to public policy. A promised X, under seal, 
binding himself by a penalty of one thousand dollars, 
that he would marry no one but her. The contract 
was held void because it had a tendency to promote 
celibacy. In the same way, any agreement which tends 
to separate husband and wife, or to prevent their living 
together again, if already separated, is void. A in his 
will provided that fifty dollars a week should be paid 
to his daughter so long as she should live separate 
from her husband. Even though it be given by a will, 
which is construed much more liberally than a con- 
tract, such a gift is invalid because it holds out induce- 
ments to the wife to live apart from her husband. 

9. Agreements in Restraint of Trade. — If two or more 
parties enter into any agreement which has a tendency 
to restrain the freedom of trade, such an agreement is 
void. A, who was a manufacturer of machinery, sold 
his business to B, conveying to him the good-will as 
well as the plant, and agreed never again to engage in 
a similar business. The agreement was held void as 
being contrary to public policy. Waiving for a moment 
the discussion as to the correctness of this decision, we 
may observe that it is always proper for a man in sell- 
ing the good-will of his business to agree not to engage 



98 CONTRACTS 

again in the same business in the same place, or within 
a reasonable distance therefrom, or perhaps not at all 
within a limited time. This would be necessary in 
order to protect the purchaser. But, under ordinary 
circumstances, an agreement never again to engage in 
the same business is thought to be an agreement in 
restraint of trade. Suppose, however, that you are a 
manufacturer of a peculiar kind of rifle, which is pro- 
duced by no other manufacturing company in the world. 
You therefore supply the markets of the world; suppose 
you sell your business, with its good-will, to me; my 
purchase would be valueless, if you, with all your expe- 
rience and your intimate association with the govern- 
ments who were your purchasers, should again engage 
in the same business and compete with me. Under 
such circumstances, an agreement by you that you 
would never again engage in the same business, would 
be binding. No precise rule can be laid down with 
regard to this question. The courts will always examine 
the facts of each particular case and endeavor to ascer- 
tain whether or not the agreement be a reasonable one. 
Perhaps the kind of agreement in restraint of trade 
which is now occupying public attention more than 
any other, is the agreement which tends to promote a 
monopoly and to stifle competition. The combinations 
of capital familiarly known as trusts, which have for 
their object the promotion of the interests of the vari- 
ous contracting firms and the prevention of competition 
by outside parties, are contrary to the common law 
because they are in restraint of trade. Contracts 
between these various firms, which have for their 
object the promotion of monopolistic interests, are void 
as between themselves ; yet, inasmuch as all the parties 



LEGALITY OF OBJECT 99 

of the contract are willing to perform it, and it is to 
their own interest not to break it, it is impossible to 
prevent such combinations under the present laws. 
Congress has under advisement at the present time a 
project to pass a bill drafted in such a form that it will 
be possible to prosecute criminally the officers and mem- 
bers of corporations or firms which enter into such con- 
tracts. Whether or not such a law can be successfully 
enforced, is perhaps a question. It is almost impossible 
to secure sufficient evidence to convict the offender. 

10. Effect of Knowledge of Illegal Purpose. — Some- 
times a contract will be entered into between two per- 
sons, one of whom is aware of an illegal purpose while 
the other is not. A hired a brougham to B, which was 
to be used for an immoral purpose; A, not having 
known this, sued B for the hire of the vehicle. The 
court allowed him to recover, saying, as far as he was 
concerned, the transaction was legal. This rule, how- 
ever, holds good only in a case where the contract is 
apparently a perfectly innocent contract. Where its 
illegality appears upon its face, neither party has any 
rights under it. 



LcfC. 



SECTION II 

PEESONS AFFECTED BY CONTRACT 



CHAPTER I 



UPON WHOM THE FORMATION OF CONTRACT MAY 
CONFER RIGHTS AND LIABILITIES 

1. General Rule as to Persons affected by Formation of 
Contract. — In the preceding section of this book we 
have discussed the manner in which a contract may be 
created. We now assume that a valid contract has 
been formed, and apply ourselves to the task of discov- 
ering upon whom it may confer rights and upon whom 
liabilities. Having secured our contract, we wish to 
know what persons are bound under it and who may 
enforce these obligations. It may be laid down as a 
general proposition that the only persons who acquire 
rights or liabilities by the formation of a contract are 
those who are parties to it. The one who gives the 
consideration should receive the benefit, and he who 
makes a promise should perform it. It is possible for 
one man to substitute another for himself after the 
contract has been made; but, except in very rare in- 
stances, the persons who contract cannot vary the 
rights of others. 

100 



RIGHTS AND LIABILITIES OF PARTIES 101 

2. Exception to the Rule under Certain Conditions. — 

The rule above given is almost universally true. If 
I contract with you that I will pay X one hundred 
dollars, that contract confers no rights upon X, and 
he cannot sue me for the one hundred dollars. The 
English law is emphatic on this point; it says that 
under no circumstances can a third party obtain a right 
by virtue of a contract to which he is a stranger. Under 
most circumstances this rule is correct in America; 
but in certain peculiar cases it has been somewhat 
altered to meet obviously sensible requirements. Sup- 
pose I owe you one hundred dollars, and you owe X one 
hundred dollars. Your debt to X is due, and he comes 
and demands his money. Being unable to pay him you 
agree with him that instead of paying my debt of one 
hundred dollars to you, I shall pay it directly to X. 
Then you come to me, and we agree that I shall pay 
the one hundred dollars to X, in accordance with your 
arrangement with him. In consideration of this, you 
release me from my debt to you. In such a case as 
that, it certainly seems as though X should be allowed 
to sue me if I refuse to pay. He could not do so in 
England because the consideration did not come from 
him ; but he may in most of the states in this country. 
In ordinary situations, the rule is that A and B con- 
tracting together can confer no rights upon C. 

3. Contracting Parties cannot impose Liabilities upon 
Third Persons. — Although there may be some instances 
where contracting parties may confer rights upon third 
persons, the rule is perfectly well settled that two per- 
sons contracting together cannot bind, or in any way 
impose obligations upon, a third. This seems to be 
nothing more than common sense. Certainly, a man 



102 CONTRACTS 

ought never to be bound by a contract to which he was 
a stranger and to which he gave no consent. 

4. Third Persons may not interfere with a Contract. — 
Although the formation of a contract between two indi- 
viduals cannot confer obligations under that contract 
upon a third party, it does impose upon all other persons 
the duty of non-interference with the relation thus 
established. You will remember in the introductory 
chapter upon the subject of contracts, it was stated that 
the contract is a legal relation established between the 
parties. It is a thing in itself. That legal relation, 
or contract, is a thing of value. If any third person 
disturbs it by any improper means, he has been guilty 
of a wrong — he has interfered with the property of 
another. If A is under contract to work for B for the 
space of one year, and X maliciously induces him 
to leave B's employment before the year is up, there 
is no doubt that he would be liable in damages. Some 
authorities limit the remedy to cases where improper 
influences, such as threats, or violence, or false state- 
ments, have been used. Others intimate that the pur- 
pose must be the malicious intent to injure the plaintiff. 
The precise limitations of the rule may, perhaps, be 
somewhat uncertain; but, in general, inducing a man 
to break his contract with another is, under most 
circumstances, a wrong for which redress may be 
obtained in the courts. 



CHAPTER II 

ASSIGNMENT OF CONTRACTS BY THE ACTS OF THE 
PARTIES 

1. General Rule as to Assignment of Rights and Liabili- 
ties under the Contract. — We have seen that, with few- 
exceptions, the formation of a contract confers rights and 
liabilities upon those only who are parties to it. But 
while this is true, one party to a contract may, under 
certain circumstances, withdraw from it and substitute 
some one else in his place. A few years ago this could 
not be done so as to give the person to whom the right 
under the contract was transferred, who is called the 
assignee, any right to enforce it. At the present time, 
however, one may assign his rights, though not his 
liabilities ; so that the assignee may sue in a court of 
equity, in case the other party to the contract refuses to 
perform ; in many states he may sue in a court of law. 

To illustrate what is meant by the assignment of 
rights and liabilities, suppose A contracts to sell a cer- 
tain quantity of flour to B for a sum of five hundred 
dollars. Before B pays, A can direct him to pay the 
money to X, but he cannot direct him to receive from X 
the flour contracted for. On the other hand, B may, if 
he chooses, direct A to deliver the flour to S ; but he 
cannot direct A to look to S for payment of the price. 

Before the assignee can be accorded the right to sue, 
however, it must appear that he has given value for the 

103 



104 CONTRACTS 

rights which were assigned to him; and it must also 
appear that he has notified the opposite party to the 
contract that he has acquired his rights. The rule 
that no liabilities can be assigned is based on common 
sense. If it were otherwise, you might be obliged to 
allow a man to work for you with whom you had not 
contracted and whose services you did not want. 

2. Rights which the Assignee Acquires. — When a con- 
tract is assigned, the assignee steps into the shoes of the 
original party, who is called the assignor. He acquires 
precisely the rights which the assignor had — no more 
and no less. If you fraudulently induce me to enter 
into a contract with you, you cannot enforce that con- 
tract against me. I have a right to go into a court of 
equity and have it annulled. If you assign your part 
of the contract to X, has X any greater rights against 
me than you had? It is clear that he has not. He has 
exactly the same rights that you had, and no more. As 
I was entitled to avoid the contract as against you, I 
may also avoid it as against X. You had nothing but 
a fraudulent claim against me ; X got an equal claim 
by the assignment. Any defence that could have been 
set up by me against you, I now may set up against X. 
This is the universal rule. 

3. Necessity for Notice. — Although the contract may 
have been assigned in a perfectly regular manner, the 
assignee acquires no rights under it until the other 
party to it has been notified of the assignment. This 
rule is a very sensible one, otherwise one would be in 
the position of not knowing for whom he must perform 
his obligations. Suppose you sell me a farm for which 
I am to pay in installments. You hold a mortgage to 
secure yourself, until I shall have made the last pay- 



ASSIGNMENT OF CONTRACT BY PARTIES 105 

ment. Suppose I have paid j^ou part of the money, 
and then you assign the contract to X. Naturally, I 
am looking to you as my creditor, and, until I am noti- 
fied to pay the money to X, I would continue to pay the 
purchase money to you. X acquires no right to have 
me pay the purchase money to him until I am notified 
that I am to do so. Consequently, if I pay another 
installment to you, or your agent, after the assignment 
has been made, but while I am still in ignorance of it, 
I am protected. X cannot collect the money from me 
the second time, but must look to you for it. 

4. Necessity for Consideration. — Not only must the 
other party to the contract have been notified before 
he can be charged, but it must also appear that the 
assignee has given a valuable consideration for the 
transfer of the contract rights to him. If this were not 
true, assignments of contracts would be made for the 
sole purpose of permitting the second party to sue upon 
them, when there was really no bona fide sale of the 
contract rights. It is to prevent such transactions that 
the rule as to consideration has been developed. 



CHAPTER III 

ASSIGNMENT OF CONTRACTS BY OPERATION OF LAW 

1. General Principles. — Not only may the parties 
assign contract rights by their own acts, but under cer- 
tain circumstances the rights, and also the liabilities, 
may be transferred to some one else without any actual 
assignment. Suppose A and B make a contract by 
which it is provided that B is to erect a house for A. 
While the house is in process of completion A dies; 
now, what is to be the result? Is B to be released from 
the necessity of performing the remainder of his con- 
tract ? Or will he be compelled to complete the erection 
of the house for some one else who is representing the 
dead man ? The latter is the case. When a man dies 
all his personal property passes, by operation of laAV, to 
certain officers, sometimes appointed by the man himself 
and sometimes by the court, who represent him and are 
to settle up his estate. These officers are called execu- 
tors if they are appointed by the will of the deceased, 
and administrators if they are appointed by the court, 
no executor having been appointed. Rights under the 
contract are personal property. They, therefore, pass 
to the representatives of the decedent, and they acquire 
all his rights under those contracts. In the illustration 
which we have given, the representatives of A could 
require B to finish his contract, and could hold him 
strictly to account for any default therein. These per- 

X06 



ASSIGNMENT OF CONTRACTS BY LAW 107 

soiiiil representatives are also, within certain limita- 
tions, responsible for all claims against the estate, 
therefore the liabilities of contracts into which the 
decedent has entered will be imposed upon them. 

The same principles apply if a man becomes a bank- 
rupt, that is, if he surrenders all his property to the 
court to be distributed among his creditors, and receives 
a discharge from all previous liabilities. In such a case 
an officer is appointed by the court, in whose hands all 
the bankrupt's property is placed, and who settles up 
the estate and pays off the creditors. To this officer, 
called the trustee in bankruptcy, pass all the rights 
under any contracts into which the bankrupt may have 
entered, if these contracts are capable of assignment. 

There are also certain other classes where contract 
rights pass from one person to another without any 
express assignment of those contracts. This class in- 
cludes those cases where the owner of land has made a 
contract about that land with the owner of some contig- 
uous property, and where the agreement thus entered 
into directly benefits the neighboring land, as where a 
man agrees with his neighbor not to build any house 
nearer than twenty feet to the street. This is obviously 
a benefit to his neighbor, in that it permits him to have 
better air and light than he otherwise would have. In 
such cases the rights under that contract may pass to 
subsequent purchasers of the adjoining land without 
any express assignment of the contract itself. 

A. Cases where Liabilities do not pass by Operation of 
Law; Contracts for Personal Service. — There are some 
contracts which, by their nature, are incapable of as- 
signment, such as one which calls for the personal ser- 
vices of one of the parties to it. If you employ a man to 



108 CONTRACTS 

work for you by reason of some personal quality which 
that man possesses, you cannot be compelled to accept 
the services of some one else, nor would he be com- 
pelled to work for any one except you. If you hire X, 
who is a celebrated portrait painter, to paint your por- 
trait, and he dies before the completion of the work, it 
would be manifestly absurd to suggest that his personal 
representative should finish the picture, and then claim 
the price. It would be equally impossible for you to 
assign, your contract to B and convey any right to him 
to compel X to paint his portrait. All contracts call- 
ing for a personal relation between the parties are un- 
assignable. 

B. Contracts whose Breach involves purely Personal 
Injuries. — There is another class of contracts in which 
neither rights nor liabilities will pass by operation of 
law to the personal representatives or to the trustee in 
bankruptcy. These contracts are those the breach of 
which involves only a personal loss to the party injured, 
and which does not in any way affect the value of his 
estate. A contract to marry is one whose breach will 
never give rise to a cause of action on the part of any 
person except the contracting parties. A was engaged 
to marry B. B broke the engagement. A afterward 
died. Her executors sued B to recover for breach of 
promise. It was held that they could not recover. 
Such a damage as that is purely personal in its nature. 
It does not either diminish the estate of the decedent 
nor increase the estate of the wrongdoer. With the 
exception of such contracts all contractual rights and 
liabilities pass by death to the personal representatives. 

C. Cases where One of the Parties to the Contract is a 
Bankrupt. — We have referred briefly to the situation 



ASSIGNMENT OF CONTRACTS BY LAW 109 

where one party to a contract has become a bankrupt. 
We have seen that as soon as he is adjudged a bank- 
rupt, all his property passes at once to an officer of 
the court, who is called the trustee in bankruptcy. 
The rights and liabilities, under contracts which the 
bankrupt may have entered into, pass at the same time 
to the trustee. The trustee, therefore, may sue on such 
contracts, and is liable to be sued by other contracting 
parties who may have claims against the bankrupt's 
estate. Almost the same limitations are present in the 
case of a bankrupt that we noticed above in the case 
where a man has died. A trustee cannot sue upon con- 
tracts for purely personal services, nor upon those the 
breach of which involves purely personal injuries. The 
trustee also has a peculiar privilege, by reason of the 
nature of his office, in that he may repudiate unprofit- 
able contracts within a certain time if he chooses to 
do so. 

D. Contracts which pass with the Sale of Land ; Leasehold 
Interests. — We briefly referred in the opening para- 
graph of this chapter to a class of cases in which rights 
"under a contract may pass with the title of land which 
has been sold, when there has been no express assign- 
ment of the contract itself. Under some circumstances, 
simply the act of passing the title to land, or to some 
interest in land, will carry with it certain contract 
rights, and sometimes certain contract liabilities. We 
will first discuss the case in which we are dealing 
with what is known as leasehold interests in land. 
If I am the owner of land and lease it to you for a 
period of twenty years, you are said to own a lease- 
hold interest. You may convey all the "right, title, 
and interest " which you have in those premises to X, 



110 CONTRACTS 

and X is then entitled to the same possession and priv- 
ileges to which you were entitled, and is called the 
assignee of the leasehold interest. If, when I leased 
to you, you made an agreement in your lease, called a 
covenant, by which you bound yourself to keep the 
house on the premises in good condition, would the 
act of assigning 5^our leasehold interest to X carry with 
it the obligation to repair ? To use more technical 
language, would the covenant in the lease bind the 
assignee ? In that case it would, irrespective of 
whether you had contracted only for yourself or also 
on behalf of your assigns. You may covenant to do 
a certain act, or you may covenant that you and your 
assigns will do it. In the case we have stated here 
it would make no difference whether you named your 
assigns or not; they would be bound, and X would have 
to repair. That rule is generally stated thus; Cove- 
nants in a lease, which relate to the management or 
repair of the land or some existing thing upon the land, 
will bind the assignees of the lessee, whether he names 
them in his covenant or not. 

But suppose you had covenanted that you would, 
within five years, build a new barn, of a certain size 
and value, upon a certain part of the land. In that 
case X (supposing, again, that you had assigned to him) 
could not be compelled to carry out that agreement 
unless you in your covenant expressly declared that 
you intended to bind your assignee. That rule is 
usually stated as follows : A covenant by a lessee to 
build something, or to do something concerning a thing 
not then in existence, will bind his assignees only when 
he expressly names them in his covenant. If he does 
they will be bound, otherwise they will not be. 



ASSIGNMENT OF CONTRACTS BY LAW 111 

These rules hold good only in cases where a covenant 
in the lease relates explicitly to the land or to some- 
thing on the land. If you had made a covenant in the 
lease by which you had personally bound yourself to do 
or not to do some particular thing not relating to the 
land itself, then your covenant could not bind your 
assignee. If, in the same illustration, you had cov- 
enanted that, in consideration of the lease to you, 
you would never keep sheep upon the premises, the 
covenant would probably not bind your assignee under 
any circumstances, because it would be construed to be 
a personal covenant not concerning the land or its use. 
Therefore, it is said, if the covenant be of a purely 
personal nature, it will not bind the assignees even 
if named. 

E. Covenants in Deeds conveying an Absolute Title to 
Land; at Law. — Having briefly examined the rules 
relating to covenants in leases, we will now discuss the 
situation where there has been a covenant in a deed, 
which conveys an absolute or, as it is called, a "fee 
simple " interest. Suppose I sell you a piece of land 
adjoining mine, and upon my land there is a dam so 
situated that the water which it intercepts flows over 
your land and forms a mill-pond. You are the owner 
of a mill, which depends for its water supply upon the 
pond thus created. When I sell you the land with the 
mill, I make a covenant in the deed by which I convey 
the premises to you, that I will keep the dam in re- 
pair. If you sell your land to A, could A force me to 
keep the dam in repair? In other words, would the 
benefit of the covenant which I made with you pass to 
A when he purchased the land? In this case it would. 
The covenant was manifestly made for the benefit of the 



112 CONTRACTS 

man who owned the adjoining premises, including the 
mill. Therefore, whoever buys the premises is entitled 
to the benefit of the covenant which I made. 

But if I sell my land to X, could you force X to keep 
the dam in repair? Perhaps I sold to X not mention- 
ing the fact that I was under an obligation to repair the 
dam. Would it be fair to permit you now to place 
upon X the burden of performing a covenant of which 
he may have had no notice? It seems reasonable to 
conclude that it would not. The benefit of a cove- 
nant will pass to all subsequent purchasers of the land 
for the benefit of which it was made; speaking techni- 
cally, it will "run with the land," but the "burden" of 
a covenant, that is, the obligation to perform (in this 
case, the obligation to repair the dam), will not pass 
with the land to the subsequent purchasers. This is 
the rule in courts of law. 

F. Rule in Equity ; Restrictive Covenants. — The rule 
as above stated is also the rule in equity when the cove- 
nant is one similar to that given in our illustration. 
A covenant to perform an active duty will not, under 
any circumstances, bind the purchaser of the land. 
Under certain conditions, however, covenants not to do 
certain specified acts will bind the subsequent pur- 
chasers. Suppose I am the owner of a large tract of 
land which I have laid out in city lots. I form a plan 
by which it is provided that no house shall be built 
nearer than twenty feet to the street upon which it is 
situated. There is a stipulation in the deed by which 
I convey one of these lots to you that you shall not 
erect a house within twenty feet of the street. You, 
of course, cannot erect a house within that distance, 
but could one who purchased from you do so? This 



ASSIGNMENT OF CONTRACTS BY LAW 113 

brings us again to the original question, whether the 
burden of the covenant will run with the land. In this 
case, you will notice, the covenant is not an agreement 
to do an act, it is an agreement to refrain from doing an 
act. If the subsequent purchaser of the land was noti- 
fied that such an agreement had been made by yourself, 
he will not be permitted to break the terms of that cove- 
nant. A covenant like this is known as a restrictive 
covenant, and will always be enforced by a court of 
equity as against subsequent purchasers of the land, if 
they were notified of its existence. The foregoing 
are all examples of cases where contract rights are 
transferred from one party to another without any 
express assignment. 



SECTION III 
INTEKPRETATION OF CONTEACTS 



CHAPTER I 

GENERAL RULES FOR INTERPRETATION OF CONTRACTS 

1. Literal Meaning of Words to be Followed. — We have 
now seen how the contract may be created and what 
parties it may affect, and we now ask, How shall we 
interpret it? We will suppose that the parties have 
fallen into a dispute over their contract, and are now in 
court. The question is, What does the contract mean ? 
One party thinks it means one thing : the other thinks 
it means something else. We will suppose the con- 
tract to be either written or oral, but that its terms 
have been clearly proven, and the one question is, 
What do those terms mean? The first rule of inter- 
pretation is, if the words are clear in meaning, that 
meaning must be taken literally. If you have plainly 
said one thing, you will not be allowed to contend 
that you meant something else. Your words may have 
a legal significance of which you were ignorant, but 
that is your misfortune, and you cannot offer it as an 
excuse for interpreting the contract in some other way. 
If there is a clear mistake in grammar, or if there has 

114 



GENERAL RULES FOR INTERPRETATION 115 

been an omission of some word in a written contract, 
which plainly was a mere inadvertence, then perhaps 
the contract may be corrected or explained. But the 
error in such a case must be perfectly plain. There 
must be no doubt as to the real intention of the parties. 
The point here to be insisted upon is that where the 
words are clear they must be taken to mean exactly 
what they say. 

2. Intention of Parties to be Deduced from the Whole 
Agreement. — Keeping in mind the rule that the words, 
if plain, must be taken to mean only what they clearly 
indicate, it should yet be understood that the whole 
agreement will be considered by the court and inter- 
preted as one complete contract; it will not take one 
sentence or group of sentences and give effect to that 
part of the agreement, when its meaning is clearly 
inconsistent with another part of it. If, after consid- 
ering all its terms, the court is able to deduce from the 
contract the real intention of the parties, it will do so 
even though it may, in one sense, do violence to the 
apparent meaning of some particular clause. If the 
contract be made subject to a term understood by both 
parties to be introduced into it, although, perhaps, 
not expressed upon its face, that will be taken into 
consideration. 

Moreover, if a contract is made in a country where a 
peculiar custom or usage is known to be in force, it 
is understood to be made subject to this custom or 
usage. Where a contract of services was entered into 
by a drummer or traveling salesman, by which he un- 
conditionally agreed to work for a mercantile house 
during a specified term of years, he gave three months' 
notice, and ended his relations with his employers. 



116 CONTRACTS 

When he was sued for damages, he contended that 
there was a custom which permitted a drummer to ter- 
minate his term of service by giving three months' 
notice, and that this contract was made where that 
custom was in force, and therefore was subject to its 
terms. The court sustained this argument. The in- 
tention of the parties, as collected from all the circum- 
stances, must have been to make the custom a part of the 
contract, inasmuch as it was a usage in that locality and 
had not been expressly excepted. In the same way, if 
the parties have stipulated that a thing be done within 
a certain time, as we have already seen, the court will 
carefully survey the whole agreement to see if the 
intention of the parties contemplated making the stipu- 
lation as to time an essential element of the contract, 
and will enforce it accordingly. 

A. Distinction between Penalty and Liquidated Damages. 
— As an example of the rule that the court will exam- 
ine the entire agreement and endeavor to collect there- 
from the intention of the parties, we may here refer to 
the interpretation of contracts providing for the payment 
of a fixed sum by either party who has been guilty of a 
breach. The question involved in such cases is whether 
the fixed sum was intended by the parties to be a pen- 
alty or to be what are known as "liquidated damages." 

Suppose you have agreed to build me a house and to 
complete the work by June 1, 1900, which you fail to 
do. In the contract is a clause providing that for every 
day beyond June 1 during which the house remains 
uncompleted, you are to pay me one hundred dollars. 
Now, it becomes very important to determine whether 
we intended this one hundred dollars to be paid by you 
. as a penalty for your failure to complete the work within 



GENERAL RULES FOR INTERPRETATION 117 

the stipulated time, or whether we intended it to rep- 
resent the amount of damages I would sustain by the 
delay, and for it to be paid to me as such. If it is 
construed to be a penalty, then, when I sue you, I can 
recover nothing but my actual loss, which would be 
proven by me and determined by a jury. But if the 
one hundred dollars per day is construed to be liqui- 
dated damages, then T may recover the entire amount, 
regardless of the extent of my actual loss. 

We may have expressly stated in the contract that 
the sum to be recovered is to be considered liquidated 
damages, but the court will pay no attention to that. 
It will look at the whole agreement to see what it 
really is, regardless of what you or I may have said it 
is. This may seem to be disregarding a term in 
the contract; but it is not, in reality. The parties, 
you and I, have made an agreement. The sum named 
for recovery is either a penalty or liquidated damages ; 
that is a legal question. I cannot make a penalty 
liquidated damages by saying so, any more than I can 
make an instrument a sealed contract by simply insert- 
ing a clause saying that it is sealed when it is not. The 
court is the one to determine whether the provision for 
the payment of the one hundred dollars per day is 
a stipulation for a penalty or for liquidated damages. 

There are one or two rules which are universally 
followed in arriving at this conclusion. If the amount 
stipulated to be paid on breach of the contract is to 
compensate for a loss, uncertain in amount, and 
which it is impossible to ascertain in advance, then 
the sum is liquidated damages. In the illustration 
above, where the one hundred dollars per day was 
to be paid for delay in finishing the house, that one 



118 CONTRACTS 

hundred dollars per day would be recoverable as 
liquidated damages. There jou see the amount of 
loss is uncertain. If the amount stipulated for is 
to compensate for a loss which is certain and defi- 
nite in amount, and the amount recoverable is greater 
than the loss, it is a penalty. Suppose I give you a 
bond by which I obligate myself to pay you one thou- 
sand dollars on April 1, 1902, if, prior to that date, I 
have not paid you a debt of five hundred dollars. There 
you see the loss is definite and certain — five hundred 
dollars. The sum recoverable is more tlian the loss. 
This is a penalty, and not liquidated damages ; accord- 
ingly, you can recover only your five hundred dollars 
and any actual loss you may "have sustained. You 
cannot recover the entire one thousand dollars unless 
your actual loss has amounted to five hundred dollars. 
In some cases there may be several terms to the contract. 
The breach of some would involve ascertain loss; the 
breach of others would involve an uncertain loss. In 
such a case the party bound is given the benefit of the 
doubt, and the sum provided for is considered to be a 
penalty. 



CHAPTER II 

EXPLANATION AND ALTERATION OF WRITTEN 
CONTRACTS 

1. Advantages of Written over Oral Contracts. — It is 
always safer for one to put his contracts into writing. 
You and I may agree to-day as to a matter about which 
we are making a bargain. To-morrow you may re- 
member it one way, and I another. Each of us will 
probably remember the terms in the way most favorable 
to himself. In reducing the terms of a contract to 
writing, be sure that you are clear in your mind as 
to all the details, and then omit nothing. This point 
should be emphasized, for if you put down only the 
principal points, and trust to memory to fill in the 
rest, the writing will be of little use ; because if oral 
evidence must be brought in to explain some terms 
of the contract, the court will permit all of them to 
be thus explained, and the writing is disregarded. 
But written evidence is the best evidence, and unless 
it appears that some term of the contract has been 
omitted from the written instrument, neither party 
will be allowed to give oral evidence. That is why you 
should be careful to put everything down. As soon as 
the court allows oral evidence to be brought in, you 
might as well throw away your written contract, 
because you are in reality relying upon your memory, 
after all. 

119 



120 CONTRACTS 

2. No Oral Evidence will be Admitted by the Court to 
contradict or vary the Terms of a Written Contract. — Now, 
we will assume that we have made a written contract, 
and, a dispute having arisen concerning it, we come 
into court about it. You wish to prove the contract. 
The first thing you have to do is to prove that this 
writing is the contract between you and me. If our 
contract is sealed, you prove that I sealed and delivered 
it to you. If it is not sealed, but "parole," you prove 
that I am the party who signed. The most common 
way to prove that would be to prove the signature to 
be mine. Having established the fact that the paper 
here in court contains the written evidence of the con- 
tract between you and me, the court will say: "Let 
us see the writing, to determine what the contract in 
fact is." Then if I want to go on the stand and testify 
as to what we agreed upon, the court would say : " No, 
you have deliberately reduced the terms of your contract 
to writing. Now you must abide by what you have 
written." In other words, it is a general rule that no 
oral evidence will be allowed to vary or contradict the 
terms of a written contract. 

A. Oral Evidence to affect the Validity of a Written 
Contract. — Although I may not go upon the stand to 
testify as to the terms of a written contract which is 
before the court, I may testify concerning the contract 
if my purpose is not in any way to vary or contradict 
its terms, but is to question its validity. Suppose I 
want to testify that the contract was signed under the 
fear of violence, or under a mistake as to its nature, or 
that I was deceived by fraudulent misrepresentations 
— in all these cases I am offering evidence not as to 
the terms of the contract, but as to its validity. That 



EXrLANATION AND ALTERATION OF CONTRACTS 121 

may be done, otherwise one would be powerless to attack 
the validity of a written contract into which he had 
entered against his will, or under a mistaken impression 
as to the instrument he was signing. 

B. When Part of the Contract is Omitted. — If, as before 
pointed out, the parties, in writing their contract, forget 
to insert some important provision of it, oral evidence 
may be brought in to show what the omitted term was. 
The practical effect of such an omission is to destroy 
the advantages to be gained by writing the contract. 
Once open the door to oral evidence and the written 
agreement is of little practical benefit. In order to 
bring in oral evidence as to a missing term, the party 
who wishes to do so must first conclusively prove to 
the satisfaction of the court that some term has been 
omitted from the writing. Until he does that, he is 
not at liberty to testify at all. 

C. Oral Evidence to explain Written Terms. — Although 
you can never contradict the terms of a written instru- 
ment by oral evidence, you may, nevertheless, explain 
these termg if they are not clear. A contract may con- 
tain technical language which must be explained before 
the jury can understand what is meant. Sometimes 
the words will admit of two meanings, and then oral 
evidence may be brought in to show which one the 
parties really intended. Again, the words may be of 
such a nature that it is almost impossible to tell what 
they mean without some further explanation. 

A and B made an agreement in writing, by which A 
promised to sell wool to B. The only words in the 
contract which in any way described the wool was a 
clause in B's agreement wherein he described it as 
"your wool," meaning A's. The court allowed oral 



122 CONTRACTS 

evidence to be brought in to show what B meant by 
"your wool." In the same way technical terms may be 
explained. A vessel being insured is impliedly war- 
ranted to be sea-worthy; oral evidence may be brought in 
to show what is meant by sea-worthy, or, as was done in 
one case, to show that in the particular contract under 
discussion the parties had a different meaning from the 
one usually attached to the word. Ambiguity may 
always be explained away ; but if the language be abso- 
lutely unmeaning, oral evidence will not be allowed to 
create a meaning where there was none before, for this 
would be adding to a written contract by oral evidence. 
D. Oral Evidence to show the Existence of a Custom 
affecting the Contract. — We have referred to the fact 
that if a written contract, embodying an agreement 
between two parties, be made in a place subject to a 
particular custom or usage, that custom or usage be- 
comes a term of the contract. If the custom or usage 
be not mentioned in the agreement, and one of the 
parties wishes to prove it by oral evidence, it may per- 
haps be objected that to allow him to do so would be to 
add to a written contract by oral evidence. This, 
however, is not correct. As a matter of law, the 
custom or usage is already a part of the contract. To 
permit oral evidence to explain what a custom is, is 
merely to prove an omitted term. A case where a cus- 
tom or usage becomes a part of the contract would be 
where a tenant rents a farm for a year, dating his lease 
January 1. Oral evidence would be admissible in such 
a case, to prove that there was a custom which permitted 
the tenant to return to the farm after his lease has 
expired, and reap the wheat which he had sown the 
preceding autumn. 



EXPLANATION AND ALTERATION OF CONTRACTS 123 

E. Admission of Oral Evidence in Equity. — When you 
come into a court of equity and ask it to force the oppo- 
site party specifically to perform his contract, much 
more freedom in the admission of oral evidence is 
allowed. Courts of equity offer many remedies which 
a court of law cannot, and in applying these remedies 
they exercise a large amount of discretion. If you 
come into equity and ask the judges to force me to carry 
out my contract with you, they will carefully go over 
the ground to see if you have been guilty of any wrong- 
doing or if there is any conscientious reason why I 
should not be compelled to carry out my agreement. 
The court may, in its discretion, either grant the remedy 
or not, as it thinks best, and is not bound by rigid legal 
rules. Therefore, to see if, on the whole, the remedy 
should be granted, the court of equity will often allow 
oral evidence when a court of law would not. A made 
a written contract to buy B's house and park. B was 
seeking specific performance. A was allowed to show, 
orally, that he had misjudged the boundaries of the park, 
and thought it contained some valuable trees, which it 
did not. The court refused to carry out the contract. 

3. Alteration of Written Contracts. — Having briefly 
discussed the interpretation of written contracts, there 
remains to be said a word about the alteration of con- 
tracts which have been made in writing. If both parties 
are willing, the terms of a written contract may be 
altered at any time. This may be done by oral agree- 
ment or by actually changing the writing, remember- 
ing, however, that in cases where the original contract 
must be written, by virtue of the statute of frauds, 
the alteration must be written also. If the original 
instrument to be valid must be under seal, then the 



124 CONTRACTS 

alteration must be under seal also. These rules apply 
because the effect of altering a contract is practically 
the same thing as making a new one. It follows that 
in all cases, if the alteration be not under seal, there 
must be a consideration for it, or it is void, being a 
gratuitous promise. This consideration is usually a 
change in the contract price of the work done, etc. 
When there is a clause in the original contract provid- 
ing for alterations without a new consideration, the 
alterations are really founded on the old consideration, 
and nothing more is necessary. It is always better to 
insert some kind of provision as to alterations in the 
original contract. This will prevent disputes when the 
need for alteration arises, as it does arise in nine cases 
out of ten where the contract is a building contract. 
The alterations referred to here are those made after 
the original contract has been executed. If at the time 
the parties are negotiating, they find it necessary to 
erase or alter the terms of the paper which they are 
about to sign, it is customary to place a note on the 
margin, which calls attention to the fact that the alter- 
ation was made before the paper was signed. 



SECTION IV 
BISCHAKGE OF CONTEACTS 



CHAPTER I 

DISCHAKGE BY AGEEEMENT 

1. Mutual Release. — Having discussed the manner 
in which a contract may be created, whom it affects, 
and how it may be interpreted, we now come to the 
question, How may this relation be discharged? How 
may the tie which binds the parties be unloosed ? If 
two parties have entered into a contract by which they 
mutually bind themselves to do certain acts, it follows 
as a matter of common sense that, if they both agree, 
they may release each other from their respective obli- 
gations. As individuals may freely enter into contract 
relations with other individuals, it is obvious that by 
consent of all parties, they may just as freely retire from 
such obligations. 

If neither party has performed his part of the con- 
tract, that is, if it is an " executory " contract, nothing 
is necessary to discharge it except the mutual con- 
sent of those bound under it. In such a case the 
surrender of the rights of one is the consideration for 
the surrender of the rights of the other. If, however, 

125 



126 CONTRACTS 

one party lias performed his part of the agreement, he 
has acquired an absolute right to have the opposite 
party perform his part. If he waives that right and 
agrees to release the other party, this agreement must 
be under seal or must be supported by a consideration, 
otherwise it will not be binding. The parties, if they 
choose, instead of merely releasing one another from 
their obligations, may substitute a new agreement for 
the old, or may so alter the terms of the old agreement 
that a new one is practically made. In such cases the 
old contract is absolutely discharged. 

If two parties are endeavoring to discharge a con- 
tract by mutual consent or by the substitution of a 
new agreement, they should do it in the same manner 
in which the original contract was made. If the 
original contract is in writing, the discharge also 
should be in writing ; if it is under seal, the discharge 
should be under seal. This arises from the general 
rule that an instrument may not be discharged or 
altered by another instrument less solemn than itself. 

Sometimes the contract itself contains provisions by 
which it is to be discharged upon the happening of 
certain conditions. Suppose a common carrier, i.e, 
one who carries goods for hire, agrees to carry your 
goods safely from Liverpool to New York, "dangers 
of fire and sea excepted." If the vessel is wrecked 
at sea, or burns, the contract is at an end. Again, 
suppose a contract of service contains a stipulation 
that either party may terminate it by a month's 
notice. An exercise of the option would, obviously, 
put an end to the contractual relation. 



CHAPTER II 

DISCHARGE BY PERFORMANCE 

1. Payment and Tender. — The second way in which 
the contractual tie may be loosened and the parties 
returned to their original position, is by performance. 
If you and I have entered into a contract by which we 
have mutually agreed to perform certain acts, and we 
have both completely performed those acts, then the 
contract comes to an end, because there is no longer any 
reason for it to exist, its purpose having been accom- 
plished. If you were under an obligation to pay me 
one hundred dollars and have paid the money, it is 
perfectly clear that I no longer have any rights against 
you under the contract. If I sue you, you may plead 
"payment," and of course I cannot recover. If you 
offer to pay and I refuse to accept, you have made what 
is known as a "tender." If the defendant proves "ten- 
der," he does not thereby excuse himself from paying 
the amount of the debt, but he does excuse himself from 
the payment of any costs of the suit, or interest, or 
damages for delay. 

2. Promissory Notes in Conditional Payment. — If one 
party to the contract discharges his obligation, not by 
the payment of money, but by giving a promissory note 
for the amount, the payment is said to be conditional. 
The promissory note, as you will learn when you take 
up the part of this book relating to negotiable paper, is 

127 



128 CONTRACTS 

of value in itself, and, therefore, the contract is dis- 
charged by giving a promissory note instead of money. 
But its discharge is conditional upon the promissory 
note being paid at maturity. If it is not paid when it 
becomes due, then the original contract revives and 
again becomes in full force, so that one party may sue 
the other upon it if he chooses to do so, instead of 
trying to collect the note. 



CHAPTER III 

DISCHARGE BY BREACH 

1. The Broken Term must be an Essential Element of 
the Contract. — We have endeavored to make it clear 
that a contract is a relation which exists between two 
or more individuals. That relation may be thought 
of as involving a tension between them. They may 
be considered as being bound together by contractual 
cords. If these cords are untied by mutual consent 
of the parties, the contract is at an end, because the 
tension is destroyed. We have seen, also, that if they 
have served their purpose, then the tension is relieved, 
because it has done what it was intended to do. In the 
same way, if one party has broken some essential part 
of the contract, that will destroy the tension and, there- 
fore, destroy the contractual relations just as completely 
as any of the other methods. If one party, therefore, 
has failed to perform his part, or has done some act 
which clearly amounts to a breach of the contract, the 
relation being absolutely destroyed, no more rights can 
then be claimed or upheld under it. 

The injured party has, it is true, a right against the 
other, but it is not a contractual right; it is a claim for 
damages. In such a case the question always arises 
whether the default of the defendant, admitting there 
has been one, is of such a nature as completely to dis- 

129 



130 CONTRACTS 

charge the contract; also, whether he has broken an 
integral term of it or only a collateral agreement or 
warranty. We have already discussed the distinction 
between a representation or agreement which is an 
integral part of the contract, and one which is only 
collateral to it. In the one case, the failure to make 
good the representation, or to perform the agreement, 
will discharge the contract so as to free the other 
party from all duties on his part. In the other case, 
while this failure may give rise to an action for dam- 
ages, it will not discharge the contract itself. 

2. Breaches of Divisible Contracts. — We must not 
only examine carefully the default of the party to see 
whether he has broken an integral term of the contract, 
but we must also examine the contract itself to see 
whether the breach affects the whole of it. Is it a 
breach which will destroy the entire contract or only a 
part of it? Sometimes a contract is entered into in 
such a manner that it really consists of a number of 
separate agreements. The question then arises whether 
a breach of one of these agreements will destroy the 
entire contract, or whether it will destroy only that part 
which it affects. A agreed to sell B eight thousand 
tons of iron, to be delivered in twelve monthly install- 
ments ; B was to send wagons to receive it. He failed 
to send enough wagons the first month. The question 
was, whether the contract was really a series of twelve 
contracts, one for each month, so that a breach of one 
would have no effect on the others, or whether it was 
to be considered as one single contract, so that the fail- 
ure to provide wagons would operate as a discharge of 
the whole contract. In this case it was held that the 
failure by the plaintiff to perform his part in one month 



DISCHARGE BY BREACH 131 

did not affect the other parts of the contract — he could 
enforce the delivery in the other months. This is 
what is known as a divisible contract. This decision 
is a very close one. There are cases nearly similar 
which have been decided contrary to it. If the court is 
of the opinion that the parties really intended a series 
of agreements to constitute only one contract, then a 
breach of one of the parts will destroy the whole ; other- 
wise the decision will be as in the illustration which 
we have discussed. 

3. Breach by Renunciation. — We now assume that 
the contract is entire or single, and that the condi- 
tion violated is an essential part of the agreement. 
One of the ways in which a breach of such a condition 
may be brought about is by a renunciation of the con- 
tract. If one party distinctly declares his determina- 
tion to go no further with it, this frees the opposite 
party from all obligation to perform his part under it, 
and gives him at once a right of action for damages 
against the party so renouncing. He has this right of 
action, whether the renunciation was made before or 
after the time when the contract was to have been 
performed. 

It was thought at one time that a breach occurring 
before the time when the contract was to be performed 
would give the opposite party no right of action. It was 
thought the breach could not be complete until the time 
had come when the other party was expecting the promise 
to be fulfilled, and he had been disappointed. This 
is no longer the view of the courts. If one party dis- 
tinctly declares that he will not perform the contract, 
this operates as a complete breach. A, who was a lec- 
turer, hired B to go with him on a tour to act as 



132 CONTRACTS 

courier. The term of service was to begin on June 1. 
On May 11, A wrote to B, saying he had decided not to 
take him with him. B at once began an action for 
breach of contract, and it was held that he was entitled 
to recover, even though the time for the performance of 
the contract had not yet arrived. The breach was com- 
plete upon A's repudiation of the agreement. The 
reason for this decision has been already explained. 
The contract is in itself a thing of value, a relation, 
existing between the two parties. If either breaks 
this relation, even though it be before the time when 
the contract is to be performed, he has forever severed 
the cords which bind the two individuals, and has been 
guilty of a complete breach. It is obvious that if, after 
the time for the performance has arrived or during the 
course of the performance of the contract, one party 
refuses to continue, such a breach will absolutely 
destroy the contractual relations. 

4. Where one Party makes the Performance Impossible. 
— Not only may one party to a contract be guilty of a 
breach by formally refusing to carry out his part of it, 
but if he deliberately places it out of his power to per- 
form, he has been guilty of just as complete a severance 
of the contractual relation. As in the other cases, this 
will operate as a complete breach whether it is done 
before or after the time for the performance of the con- 
tract. A promised to assign all his interest in a lease 
to B before the expiration of seven years. After one 
year A assigned to another party. This gave B a right 
to sue at once. He did not have to wait until the 
expiration of the seven years. 

An interesting case arose during the late war between 
China and Japan. An Englishman had been hired by 



DISCHARGE BY BREACH 133 

the Japanese government to act as fireman on a 
Japanese warship on a trip from the T3^ne to Yoko- 
hama. During the voyage war against China was de- 
clared by Japan. If he had continued in the service, 
the Englishman would have been liable to punishment 
by his home government, under the penalty imposed 
by the foreign enlistments act. He contended that the 
Japanese government, by declaring war, had made his 
performance of the contract impossible, and that he, 
therefore, had a right of action for the breach. The 
court sustained him in this contention. 

5. Failure of Performance. — We have explained how 
a refusal to perform, or putting it out of one's power 
to perform, operates as a complete breach of a contract. 
It is just as complete a breach if one party without 
refusing merely fails to do his part. This really needs 
no explanation further than the observation that the 
failure to perform must be a failure to perform an essen- 
tial part of the contract, and must be applicable to it as 
a whole. The other party is not entitled to treat the 
failure to perform as a breach until after the time for 
the performance has entirely passed. 



CHAPTER ly 

DISCHAEGE EY IMPOSSIBILITY OF PEREORMANCE 

1. Impossibility Apparent on the Face of the Contract. 

— It sometimes happens that parties who have entered 
into agreements will be released therefrom, owing to 
some reason not connected with the contract itself, but 
which the court nevertheless will take into consider- 
ation. Earlier in the discussion we had an illustration 
in which A agreed to give B a sum of money, in 
consideration of which B agreed to drink up all the 
water in the sea. There was, as we saw, no contract 
created in the ca^, because the consideration which 
was given was not a real consideration, it being mani- 
festly impossible to perform it. Technically speaking, 
this is not a case of discharge of contract at all, because 
no contract ever came into existence, but it is proper to 
refer to it here because of its similarity to the subject 
under discussion. 

2. Impossibility on Account of Mistake. — We have also 
discussed in another part of the subject of contracts the 
situation in which it was impossible to perform the con- 
tract by virtue of some mistake into which the parties 
had fallen. In the illustration where A and B con- 
tracted for the sale of a cargo of corn, then supposed to 
be on board a certain ship, which was in fact at the 
bottom of the ocean, we saw that there was no contract. 
It might be said there was no contract because it 
was impossible to be performed; but the real reason is 
that the original agreement being based on mistake, no 

134 



DISCHARGE BY IMPOSSIBILITY TO PERFORM 135 

contract was ever created. This case of impossibility 
of performance is also referred to at this point, not 
because it is a technical case of discharge of contract, 
but because it is very closely allied to what follows. 

3. Impossibility arising^ after Contract is made. — In the 
two cases above mentioned, where the impossibility 
existed at the time the agreement was formed, we saw 
that no contract was created. We now reach a situa- 
tion where there was no impossibility existing at the 
time when the parties made their agreement, but where 
some facts that have arisen since have caused the per- 
formance of the contract to become impossible. As a 
general rule, common law courts will not excuse a man 
from his obligation to perform a contract on the plea 
that it has become difGcult or impossible for him to do 
so. They cannot, of course, make him perform it if it 
is impossible to do so j but he is answerable in damages 
for any loss accruing to the opposite party by virtue 
of his failure to perform, notwithstanding the fact of 
the impossibility. This occurs only in cases where the 
promisor has made his promise without conditions. If 
he does not wish to become responsible for loss in such 
cases, he should introduce some such stipulation when 
he makes his contract. 

A agreed to carry a shipload of corn from New York 
to Philadelphia, and to unload it at a wharf in the 
Delaware River before the 19th of June, 1900. If the 
weather had been propitious. A, would have had plenty 
of time to perform his contract. As it was, a great 
storm absolutely prevented him from getting up the 
river until ten days later. B sued him for the failure 
to perform within the time specified, and A replied that 
it was absolutely impossible for him to have done so 



136 CONTRACTS 

on account of circumstances which were entirely beyond 
his control. But this was no excuse. If A did not 
wish to be held responsible in such a case, he should 
have said in his contract that he would unload at the day 
specified, "storms excepted." 

A. Cases where Subsequent Impossibility will Excuse. — 
Although the general rule is as we have stated it, 
there are some situations in which the law will excuse 
the performance of a contract if it has become impos- 
sible by events arising subsequent to its formation. 

If, after the contract is made, there has been a change 
in the law of the country wherein it was to have been per- 
formed, which absolutely prevents it from being carried 
out, the parties will be excused from performance. A 
sold land to B, B making a contract by which he agreed 
that upon a certain piece of the land which he had 
bought from A, neither he nor his assigns would allow 
any buildings except ornamental ones to be erected. 
An act of Parliament provided for the erection of a 
railroad station upon that very spot. A attempted to 
charge B for the damages accruing to him by virtue of 
the erection of the station, claiming that B had uncon- 
ditionally bound himself and his assigns that no such 
buildings should be placed at that point. The court 
decided that B was excused. The act of Parliament 
authorizing the erection of the building made the ful- 
fillment of his agreement impossible. 

If a contract has been made, calling for the perform- 
ance of some personal service on the part of one of the 
parties to it, and that person dies, the contract is then 
at an end, as it is impossible, of course, for it to be 
performed. The estate of the decedent does not have 
to answer in damages for the failure to perform. 



CHAPTER V 

DISCHARGE BY OPERATION OF LAW 

A. Merger. — Under certain circumstances, a contract 
ma}^ be discharged by operation of law without any 
specific agreement by the parties, and also without any 
breach or intervention of circumstances making the 
performance impossible. We have referred briefly to 
the case where a sealed contract is made about the same 
subject-matter already included in a simple contract. 
We saw that the simple contract disappeared, and that 
we had left only the sealed contract. This is what is 
known as "merger." Whenever two instruments, one 
of which is of a higher or more solemn order than the 
other, refer to the same subject-matter, the lesser merges 
into the greater, and is thereby discharged. 

B. Alterations of a Contract. — It will be remembered 
that two parties to a contract may alter it by mutual 
consent. It goes without saying that one cannot alter 
it without the consent of the other. If I make a prom- 
issory note in your favor for the amount of one hundred 
dollars, and you so alter it that it reads one thousand 
dollars, not only is there no contract by which I am 
obliged to pay you one thousand dollars, but the agree- 
ment which I originally made to pay you one hundred 
dollars is discharged. You, by your alteration of 
the contract, have relieved me from any further 
responsibility. This is always the case if alterations 

137 



138 CONTRACTS 

be made by one party without the consent of the other, 
provided the alteration is a change in a material terra of 
the contract, and is made intentionally. If it be made 
unintentionally, the original contract stands as it was 
in the first place; or if the alteration be made by a 
stranger, that does not affect the original contract at 
all. In order to work a discharge, the alteration must 
be made by a party to the contract with the intention 
of varying the rights of the parties. 

C. Bankruptcy. — There are certain acts of Congress 
in force in this country providing that in case a man 
becomes unable to pay his debts, he may surrender all 
his property to the court in order that it may be dis- 
tributed among his creditors, and he is thereafter dis- 
charged from any further liabilities for any of his 
former debts. This discharge in bankruptcy oper- 
ates not only to discharge debts which he may owe, 
but also discharges all contracts on account of which 
he may be under some obligation. If, however, a man 
who has been thus discharged makes a new promise to 
fulfill his contract or to pay his debts, this promise will 
revive the old obligation, and he may be compelled to 
perform without any new consideration. 



SECTION Y 
KEMEDIES FOE BEEACH OF CONTEACTS 



CHAPTER I 

REMEDIES IN COURTS OF LAW 

1. Measure of Damages. — It has been shown how one 
party to a contract may be guilty of a breach, which 
operates to discharge the opposite party from any 
liability to perform his part. The contractual rela- 
tion has been absolutely severed, and neither party has 
any more rights under the contract itself. But, as you 
can well believe, it would be most unjust if the injured 
party did not have some remedy open to him. Although 
he has lost his rights under the contract, he has gained 
in place of them a right to sue for damages. If he 
does so, he may recover an amount sufficient to put 
him in the same position, so far as money can do it, 
as that which he enjoyed before the breach occurred. 
When two parties enter into a contract, they undertake 
mutually to perform it, or to pay any damages that 
could reasonably be expected to follow from a breach of 
it. Consequently, where one is suing for damages, he 
can recover only those damages which could reasonably 
be expected to result from a breach of the particular 

139 



140 CONTRACTS 

contract that was broken. Suppose a railroad company 
agrees to carry you from New York to Chicago in twenty- 
four hours. The company fails to perform its contract 
in that the train is three hours late. As a result of the 
lateness of the train, you miss an opportunity to meet a 
business engagement which would have been worth ten 
thousand dollars to you. You could not recover ten 
thousand dollars ; that amount would not be an ordinarj^ 
result of the lateness of the train. 

It must also be remembered that damages for breach 
of contract are for compensation, and not for punish- 
ment. The plaintiff can recover only his actual pecu- 
niary loss, not for injury to his feelings or to punish 
the defendant. To this rule there is one exception. 
In the action for breach of promise of marriage, the 
plaintiff may recover for injury to his or her feelings as 
well as for the pecuniary loss, if any. If an agree- 
ment has been made as to the amount of damages to be 
paid in the event of a breach, that amount is recoverable 
as liquidated damages. The distinction between liqui- 
dated damages and penalties has already been explained. 



CHAPTER II 

REMEDIES IN COURTS OF EQUITY 

1. General Principles of Equitable Jurisdiction. — 
Sometimes, from the peculiar nature of the contract 
which has been made, money alone cannot compensate 
the injured party for the breach. From the explanation 
which has been given of the duties of courts of equity, 
3^ou will understand that this is one of the particular 
places where their jurisdiction is invoked. If damages 
will not compensate, that is, if at law there is no 
adequate remedy, then the one who has been injured 
may apply to a court of equity, asking it to force the 
opposite party to carry out his part of the contract. 
This remedy is what is known as specific performance. 
The court of equity will grant it, if it clearly appears 
that there is no adequate remedy at law, and if no valid 
reason is urged why the contract should not be carried 
out in conformity with the original agreement of the 
parties. 

A. When there is no Adequate Remedy at Law. — It is 
sometimes a difficult question to decide when there is 
not an adequate remedy at law. One of the most com- 
mon illustrations of such a contract is one for the pur- 
chase of land. Suppose you have contracted to purchase 
a particular lot of ground, intending to erect a residence 
upon it. You have perhaps made extensive plans relat- 
ing to its erection, and for your arrangements after you 

141 



142 CONTRACTS 

have permanently located there. Yon no doubt chose 
the site of ground largely by virtue of its location, 
perhaps because it was situated in close proximity to 
friends, or because of the fine view that could be obtained 
from the premises. Damages could not compensate 
you for the loss of these things. You could not go 
into the market and buy another lot of ground which 
would suit you as well. If you could, damages would 
compensate you, because the other party would be com- 
pelled to pay you the difference between the price 
which you had to pay for the land which you did buy, 
and the price you were intending to pay under the con- 
tract. Courts of equity will nearly always specifically 
enforce contracts for the purchase of land. 

If your agreement is for the purchase of goods, you 
can, as a rule, be fully compensated by damages, for, 
failing to get them under your agreement, you can, 
ordinarily, go into the market and purchase them else- 
where. If you were compelled, in such a case, to pay 
more for them than you had contracted to pay, you 
could recover the difference from the party who had 
broken his contract with you. Sometimes, however, 
the specific goods may possess to you a peculiar value, 
which cannot be measured in money. If so, you may 
have specific performance, as, for instance, if you had 
agreed to purchase an heirloom that to you is of a 
value far above its intrinsic worth. 

B. Remedy Discretionary. — It should be remembered 
in this connection that the remedies granted by a court 
of equity are discretionary. It may grant an injunc- 
tion to compel the opposite party to perform the con- 
tract if it sees fit, but if it does not see fit, then you 
are not entitled to demand it as you would be entitled 



REMEDIES IN COURTS OF EQUITY 143 

to demand a remedy in a court of law, because the 
courts of equity are not absolutely bound by rigid rules, 
as courts of law are. If the party who is seeking spe- 
cific performance has been guilty of improper conduct, 
he will not be permitted to succeed. If the contract 
which he entered into with the opposite party is an 
unjust contract, the court will not enforce it. If he 
has been careless about prosecuting his remedy, and 
has waited a much longer time than was necessary, 
again will he be refused the relief which he asks. 

C. Contracts involving^ Duties of Supervision. — Fol- 
lowing out the idea expressed in the preceding para- 
graph, the court will refuse specific performance, if 
granting it would involve the court in duties which 
it does not care to undertake. Suppose B has agreed 
to build a railroad for A, the performance of which 
agreement would necessarily involve the labor of 
months, and perhaps of years. If the court should 
command B to build the road, its command would be 
useless unless it would see to it that B performs his 
work faithfully. To do that would require duties of 
supervision and oversight lasting over this long period 
of time. This the court will not undertake. If spe- 
cific performance involves such duties as this it will, 
therefore, be refused. A contract to build will rarely 
be enforced. 

D. Contracts for Personal Service. — If the contract is 
one which calls for a personal service from one party 
to another, the court will never specifically enforce it, 
because to force individuals to maintain a close personal 
relationship toward each other when they do not wish 
to do so, would be worse than to allow the contract to 
go unperformed. Moreover, it is often impossible to 



144 CONTRACTS 

enforce such contracts. If A agrees to sing for B, the 
court might compel A to go upon the platform and 
might perhaps compel her to sing, but it certainly could 
not compel her to give her best energies to the work. 
If in such a case, however, the party has agreed both 
to do some act and to refrain from doing some other 
act, the court will sometimes enforce the second part 
of the contract when it cannot enforce the first. Made- 
moiselle Wagner had agreed to sing for a theatrical 
manager, named Lumley, for an entire season; she 
had also agreed to sing for no one else during that 
period. She refused to perform her contract. Lumley 
asked a court of equity to enforce her to do so. The 
court said it could not make her sing, but it could 
prevent her from singing for some one else, which it 
did. The practical effect of this decision was to force 
Mademoiselle Wagner to sing for Lumley, because 
otherwise she would have been compelled to remain in 
idleness. 



CHAPTER III 

HOW RIGHTS OF ACTION, ARISING FROM BREACH OF 
CONTRACT, MAY BE DISCHARGED 

A. By Act of the Parties. — When the contract is 
broken, all legal rights under it disappear; in place of 
them the injured party has a right of action for the 
breach. The next question is, How may this right of 
action for the breach be discharged? The first way in 
which it may be discharged is by the voluntary act of 
the parties. The injured man may release the opposite 
party to the contract from all claims which he may have 
by virtue of the breach. Such release must either be 
under seal or else it must be supported by a considera- 
tion; otherwise it is not binding. The usual con- 
sideration in such a case would be the payment of a 
sum in satisfaction of the damages. 

B. By Suit and Judgment. — If the parties are unable 
to reach an amicable agreement with regard to the sat- 
isfaction of the claim for damages arising out of the 
breach, the injured party may be compelled to resort to 
a court of law. If he does so, and recovers judgment 
upon his claim, the right of action, which he originally 
had, thereupon disappears. He now has a claim against 
the opposite party, which is founded entirely upon the 
judgment which he has recovered. Just as a simple 
contract will merge into a sealed contract when both 
relate to the same subject-matter, so a right of action, 

145 



146 CONTRACTS 

arising out of a breach of contract, will disappear and 
merge into a debt of record when the latter is created 
by the recording of the judgment. 

C. By Lapse of Time. — In England, and in all states 
of this country, statutes have been passed which pro- 
vide that where a right of action accrues for breach of 
contract, the party to whom such right accrues, must 
prosecute his suit within a limited time, specified in 
the act, or he cannot do it thereafter. The period 
named varies in different states. In most states the 
right of action, arising from the breach of a simple 
contract, must be prosecuted within six years from the 
time the breach occurs. A right of action, arising 
from the breach of a sealed contract, must usually be 
sued upon within twenty years. In both cases there are 
exceptions made, if, at the time the contract was broken 
and the right of action arose, the person to whom it 
thereby accrued was under some kind of disability, 
that is, if he was an infant, or insane, or imprisoned, 
or "beyond seas," or, if a woman, was married. 

If some one of these disabilities existed at the 
time the right of action first arose, then the period 
of time named in the act does not begin to run until 
the time when the disability is removed. If the in- 
dividual was an infant, the statutory period is counted 
from the day he becomes twenty-one years old; if a 
married woman, it is counted from the day her husband 
dies; if "beyond seas," from the time the individual 
returns, and so on. If, at the time the cause of action 
first arose, no one of these disabilities existed, the fact 
that one was afterward imposed upon the person who 
has the right of action, will not prevent the lapse of 
time from barring the right. Suppose a woman twenty- 



DISCHARGE OF RIGHT OF ACTION 147 

two years of age comes into possession of a right of 
action for breach of a simple contract, and marries a 
year afterward. Her right of action will be barred six 
3^ears after the time her right first accrued. The fact 
that she afterward married will not help her. Just as 
in the case of bankruptcy, a subsequent promise to pay 
or to perform, will bind, so a subsequent promise to 
discharge an obligation, arising from a contract which 
has been barred by the lapse of the statutory period, 
will revive the old obligation, and no new considera- 
tion is necessary. 



PART III 
SALES 



CHAPTER I 

ESSENTIAL CHARACTERISTICS 

1. Sale distinguished from Bailment or Exchange. — 

The sale is one species of contract. In entering upon 
the discussion of its nature, we do not therefore meet 
with many principles essentially new. All the ele- 
ments of contract which we discussed in the preceding 
part of this book, are also necessary elements of every 
sale. 

The distinguishing features that separate sales from 
other contracts are, first, the circumstance that the 
sale is a contract for the transfer of the ownership of, 
or title to, property; and, second, that the transfer 
must be for a price in money. If the property in one 
thing is transferred in consideration of the transfer of 
another thing of supposedly equal value, the trans- 
action is not a sale, but a barter or exchange. If the 
property be delivered to another temporarily, with a 
proviso that the original property is to be returned, this 
constitutes what is known as a bailment. The title to 
the thing does not pass out of the original owner. A 
barter or exchange is for all practical purposes a sale, 

148 



ESSENTIAL CHARACTERISTICS 149 

as the ownership or title to the property passes from the 
seller, called the vendor, to the buyer, who is known as 
the vendee. But a bailment is essentially different, for 
here the title does not pass at all. 

2. Difficulty of determining between Sale and Bailment. 
— It is often difficult to tell whether a transaction is 
a sale or a bailment. Suppose A sends wheat to B, a 
miller, in return for which B is to give to A a certain 
amount of flour in payment. Before the wheat is 
ground the mill burns, and the grain is destroyed. If 
the wheat is owned by A, he suffers the loss. If it is 
owned by B, he will be the loser, for having acquired 
the title, he will be obliged to deliver the stipulated 
amount of flour to A. In the case in hand, the solu- 
tion of the problem would depend upon the exact terms 
of the contract. If the agreement had been that the 
miller was to return the flour made from the identical 
wheat deposited with him, then the title to the wheat 
remained in the original owner, and the contract was 
one of bailment. If, on the other hand, the same wheat 
was not to be returned in the form of flour, but was 
to be mixed with other wheat, and the owner was to be 
paid with flour made from other wheat, then the con- 
tract would be a sale or exchange, and the title having 
passed to the miller, he would suffer the loss. 

This illustration embodies the general rule for dis- 
tinguishing between sale and bailment. If the con- 
tract calls for the return of the identical thing, though 
it may be in a different form, it is one of bailment. 
Where the identical thing is not to be returned, but is 
to be paid for by money or by some other thing of value, 
the contract operates to pass the title, and is a sale or 
exchange. 



150 SALES 

3. Exception to the Rule. — There is one exception to 
this rule which, as it is a very common one, should be 
referred to at this point. If you deposit wheat with 
the owner of a warehouse, under a contract by which 
you are to receive on demand, not your identical wheat, 
but wheat of an equal grade, your contract is a bail- 
ment and not a sale. It would be impracticable to 
keep everybody's wheat separate from the rest, when so 
many thousands of bushels are stored in one building; 
consequently, all of it which is of a similar grade is 
mixed up and stored together. 

If this has been done and the warehouse burns, 
all the depositors will lose their wheat if it is still 
their property, for, assuming the fire to be accidental, 
they will have no claim against the owner of the ware- 
house. But if the title to the wheat has passed to the 
warehouseman, then the loss falls on him alone. He 
is still bound to pay the farmers for their wheat. It 
can readily be seen that the latter result would be 
unjust. The intention of the depositors was to make a 
bailment, and not a sale. The courts, taking this into 
consideration, have decided that, although such a con- 
tract does not provide for the return of the specific 
thing, it is, nevertheless, a bailment. They reconcile 
this with the rule above given by saying, that while 
the specific wheat is not to be returned, yet the return 
of wheat of equal grade is practically the same thing 
as the return of the identical wheat put in, — in short, 
that a contract for the return of an equal number of 
bushels of grain of the same quality is, for all practical 
purposes, a contract for the return of the same grain. 



CHAPTER II 

WHO MAY SELL 

1. Parties must be Capable and Vendor must be Owner. 
— The parties to a contract of sale must, in the first 
place, be capable of contracting. This is obvious from 
the statement above, that all the essential elements of 
a contract must be present. In the second place, the 
vendor, as a general rule, must be the owner of the 
property which he intends to sell, i.e. he must either 
be the owner or his agent. One of the fundamental 
principles of the common law is that the title to property- 
must be protected. If your property is stolen and sold 
to A, the latter gets no title, because the thief, having 
none, could give none to the purchaser. 

When we say that the seller must be the owner, how- 
ever, we do not necessarily mean the absolute owner. He 
may have a title which he has obtained by fraud; but if 
he has title at all, he may convey a perfect title to an in- 
nocent purchaser. This is particularly true of the sale 
of negotiable instruments, such as promissory notes and 
bills of exchange. It is also true, though in a more 
restricted way, of sales of personal property. The 
possession of personal property is prima facie evidence 
of ownership; and though a vendor may have acquired 
his possession and title to the chattel by fraud, and 
although the real owner could set the sale aside as 
against the fraudulent vendee, he cannot do so as 
against an innocent vendee. 

151 



152 SALES 

A. Voidable Title and no Title. — It is sometimes dif- 
ficult to determine between cases where the fraudulent 
vendee has actually acquired title, even though it be a 
voidable one, and cases where he has acquired no title 
at all. If the latter be the case, he can convey nothing 
to a subsequent purchaser from him. If the original 
vendor parts with the property with the intention of 
selling to the party who is negotiating with him, then, 
no matter how he may have been deceived, he has parted, 
at least temporarily, with the title, and the fraudulent 
purchaser may convey to a third person a better title than 
he himself has. But it sometimes happens that a 
would-be vendee will pretend to be the agent of some 
one else. 

A went to B, a farmer, and offered to buy his wool, 
representing himself to be the agent of, and purchas- 
ing for, X and Company, a well-known firm with 
which B was familiar. As a matter of fact, A had no 
connection whatever with the firm; but B, believing 
his representations, sold his wool, as he thought, to X 
and Company, and shipped to them. A presented him- 
self to the freight agent at the other end of the line, 
again represented himself to be an agent of X and 
Company, and obtained possession of the wool. X and 
Company, who knew nothing of the previous transac- 
tions, bought of A, who pocketed the money and left 
for parts unknown. 

B, finding himself swindled, sued X and Company 
to regain possession of the wool, contending that he 
was still the owner; that as A got no title, he could 
give none to X and Company, and that the wool should 
be returned. On the other hand, it was argued that 
A got a voidable title, and X and Company, being 



WHO MAY SELL 153 

innocent purchasers, should be protected. The court 
decided that B could recover. He never intended to 
sell to A. He intended to sell to X and Company. X 
and Company never intended to buy of him, hence 
there was no contract at all, and therefore no passing 
of the title. As it still remained in B, he was entitled 
to get his wool back again. 

If, in the illustration, A had represented himself 
to be C, and B had sold to A, thinking him to be C, 
the court would have refused a recovery, on the 
ground that if the vendor intends to sell to the man 
before him, even though he is mistaken as to his 
identity, the title will pass. This is explained by say- 
ing that when you see the individual with whom you 
are dealing, you sell to the personality before you, and 
the fact that you are in error as to his name is not 
material; whereas, when you do not intend to sell to 
him at all, but to some firm whom he falsely says he 
represents, you do not sell to anybody. You do not 
intend to sell to the party before you, and the firm 
whom he says he represents, does not intend to buy, 
consequently there is no contract, and not even a void- 
able title can pass. When you bargain with the man 
before you, his personality outweighs your supposed 
knowledge as to his identity. Of course, in such a case, 
the contract ma}^ be set aside by you if it is unper- 
formed; but if the purchaser has sold to an innocent 
third party, you cannot take the property so acquired 
away from him. 

2. Cases where Vendor who has no Title at All may 
Convey. — There is a class of cases which is an excep- 
tion to the rule that one who has no title at all can con- 
vey none. When the true owner has permitted some 



154 SALES 

one else to exercise acts of ownership over his property, 
to such an extent as to deceive other people into believ- 
ing that the apparent owner is the true owner, then if 
the property be sold to innocent third parties, who rely 
upon the apparent ownership, the true owner cannot 
complain. The innocent purchaser therefore really 
gets a good title. 

In such cases it is not enough that the owner shall 
have surrounded the vendor with the appearances of 
ownership, — the purchaser must actually have been 
deceived by them. Furthermore, although the vendor 
may have been given some of the appearances of owner- 
ship, and even though the purchaser has been deceived, 
yet he will not gain a complete title unless the appear- 
ances were plain enough to deceive any ordinary man. 

The mere fact that the property was in the possession 
of the vendor is not enough, nor that he has retained it 
for a long time, with the consent of the owner. Thus, 
where a father loaned a horse to his son, allowing him 
to use it as his own, and even speaking of it as his 
son's horse, the court decided that this alone would not 
be sufficient to deceive ordinary people into believing 
that it was actually the property of the son, and an 
innocent purchaser from him got no title. 

The most common instances of cases where the pur- 
chaser gets a good title are cases where the vendor has 
retained in his own possession a chattel formerly be- 
longing to him. There his retention would operate to 
deceive third parties, and they are protected. This 
particular phase of the question will be discussed more 
at length in a later paragraph. As another instance of 
the conveyance of a good title by one who has none, 
there is a rule of law in England that if goods are sold 



WHO MAY SELL 155 

in the open market, in places where such goods are 
usually exposed for sale, the purchaser acquires a good 
title, even though the articles might have been stolen 
from some third party. This is called the doctrine of 
market overt, but has never been in force in the United 
States. 

3. Cases where True Owner invests Frandulent Vendor 
with Apparent Authority to Sell. — Although the owner 
of property may not have given another the apparent 
ownership of it, he may have given him the apparent 
authority to sell it. When the vendor sells, the 
purchaser thinks he is buying from the agent of the 
true owner. When we get to the subject of Agency, 
you will learn that one may make a valid contract or a 
sale, by means of an agent, just as well as he may do it 
himself. You will also learn that if the agent makes 
a sale which the principal has not authorized him to 
make, no title will pass. The same theory applies as 
in the case of a sale by one who has no title, i.e. no 
man can be deprived of his property without his own 
consent; consequently, as a general rule, the sale by the 
agent passes nothing unless he was authorized to make 
it. But where the principal has apparently given him 
authority to sell, the same rule should and does apply, 
as in cases where the owner has given the fraudulent 
vendor the appearance of being the owner. In both 
cases third parties are deceived. In both, if the appar- 
ent ownership or apparent authority be sufficient to 
deceive, the innocent purchaser will be protected. 

4. Factors' Acts. — A "factor" is an agent to whom 
goods are shipped to be sold by him on commission. 
The name "commission merchant" is perhaps more 
familiar than "factor." If goods are shipped for this 



156 SALES 

purpose to a factor, he, obviously, lias the apparent and 
usually the real authority to sell. In the many thou- 
sands of business transactions of this character which 
daily take place, it would be very inconvenient to 
require every purchaser to investigate the exact extent 
of the authority of the commission merchant from whom 
he proposes to buy. In order to obviate this difficulty 
and facilitate business, various acts of legislation have 
been passed in England, and in this country, all of which 
contain substantially the same provisions, viz., that 
whenever goods have, in the regular course of trade, been 
intrusted to a factor, or commission merchant, for pur- 
poses of sale, the purchaser has a right to suppose that 
the factor has the authority to make an absolute sale, 
and may purchase without fear of loss, for the act says 
his title thus acquired shall be valid. 

It must not be supposed, however, that these acts 
will protect a purchaser from any agent to whom goods 
have been sent for sale. The operation of the statutes 
is limited to cases where the transactions are strictly 
commercial in their character, i.e. where they concern 
only merchandise in the limited sense of the word; 
and they apply only to commission merchants or 
factors, — not to other persons who may be temporary 
agents for purposes of sale. In order to determine the 
exact effect of these acts, you should consult the statutes 
of the state in which you live. 



CHAPTER III 

WHEN THE TITLE TO THE GOODS PASSES 

1. Title passes when Contract of Sale is Complete. — " 
From our study of contracts you know when contractual 
rights and liabilities are fastened upon the contracting 
parties, viz., when the contract has been completed. In 
contracts dealt with by the branch of law which we are 
now studying, the object of the contract is to pass the 
title to property; consequently, this object is accom- 
plished, and the title does pass as soon as the contract 
is made. You will remember that an ordinary contract 
is complete when offer and acceptance have taken place ; 
but in the class of contracts which we are now discuss- 
ing, a little more definite manifestation of the inten- 
tion of the parties than mere oral offer and acceptance, 
ordinarily expressed by a "delivery" of the goods, is 
required. 

2. What is meant by Delivery. — In interpreting the 
rule that there must be delivery before the title passes, 
you must not make the mistake of thinking that this 
means in all cases an actual physical transfer of the 
property sold. In many cases this would be impossible. 
Delivery may be defined as the mental surrender of 
the goods by the seller to the buyer. This mental sur- 
render usually takes place when the goods are actu- 
ally handed over; but, as we shall see, not always. 
Suppose you lease me a house, containing furniture 
which you sell to me. In that case it would, of course, 

157 



158 SALES 

be absurd for you to take the furniture out of the house 
in order to deliver it to me, who am about to put it back 
again. In all such cases, if there is no intention to 
defraud creditors, such delivery, made mentally, is 
good. 

If the vendor has set apart the specific goods which he 
intends to sell to the vendee, and has done every act 
Avhich he has agreed to do in reference to them, and is 
merely waiting for the vendee to take them away, 
then obviously, even though the goods may still be on 
the premises of the seller, they may be said to be 
delivered and the title has passed. 

But suppose A sells B one hundred head of cattle, 
and, by the terms of the agreement, A is to weigh 
them. He has not done so as yet. The sale is not 
complete. A sells B a certain bin of wheat. A is to 
measure it, and has not performed his agreement. 
Again, no title has passed. Whenever anything at all 
is left to be done by the vendor, the contract is incom- 
plete. 

Sometimes it happens that everything has been done, 
so far as setting aside the property is concerned, but 
that the precise amount of the cost of the article has not 
been calculated. This of itself will not prevent the 
delivery from being considered complete. A sold B 
several piles of lumber, which were set aside and 
marked. B was to take them away, measure them, and 
pay A a specified price per foot. Before the lumber 
was moved it was destroyed by fire. The question 
then arose as to who was the owner. The court decided 
that the title had passed to B, inasmuch as A had done 
everything he was called upon to do. The goods there- 
fore could be properly said to have been delivered. 



WHEN THE TITLE TO THE GOODS PASSES 159 

3. Where the Goods have not been specifically Set Aside. 

— So far we have considered the question of delivery 
as applied to cases where specific goods were the sub- 
ject of the contract. But sales may be effected of a 
part of a large quantity of goods, when the part sold has 
not been separated from the remainder. Suppose a 
dealer sells a number of rolls of paper, say one thou- 
sand, out of a stock containing ten thousand rolls. 
The question then might come up whether the title to 
the paper sold would pass, unless the actual number of 
rolls were separated from the remainder. The general 
rule is that it will not. The property to be sold must 
be definitely set aside, and specifically applied to the- 
purpose of the sale, or no delivery, either mental or 
physical, is possible. There is an apparent exception 
to this in cases where all the property mingled 
together is of exactly the same kind; for instance, 
where wheat is stored in an elevator. If you own one 
thousand bushels in a certain elevator containing ten 
thousand bushels, you may sell j^our one thousand to 
me and pass the title by a delivery of your grain receipt 
only. This constitutes a symbolical delivery, and as 
all the grain is alike, no actual separation is necessarj^ 

4. Mental Consent of both Parties must always be Present. 

— While specific rules are valuable to aid us in our 
interpretation of the acts of the parties, yet it must not 
be lost sight of that, after all, the real question at 
issue is whether the contract of sale has been completed 
by a mental surrender of the goods by the seller to the 
buyer. This mental consent must always be present, 
and even though there may be an actual physical 
delivery, no title will pass unless it is. If the actual 
possession of the goods be obtained by fraud or trickery 



160 SALES 

on the part of the vendee, this will not operate to pass 
the title. Delivery of goods on board a train is usually 
deemed to be delivery to the buyer to vi^hom the goods 
are shipped, and so the title passes at once; but if the 
vendor delivers the wrong article on board the train, 
the title to this will not pass, because the vendee never 
consented to have that article delivered to him. 



CHAPTER IV 

CONDITIONAL SALES. 

1. Where Title is not to pass until the Price is Paid. — 

Sometimes goods are sold under certain conditions, by 
which the title is to remain in the vendor until the 
purchase money is paid. The most familiar example 
of this is the sale on the installment plan. In such 
cases the chattel, a sewing-machine, piano, or whatever 
it may be, is delivered, but it is understood that until 
the last installment is paid the title is to remain in the 
vendor. If the question arises between the two original 
parties to the agreement, it is perfectly valid; that is, 
the title does not pass until payment, and the vendor 
can retake the goods. But suppose the rights of third 
parties should become involved. Suppose the buyer 
executes a chattel mortgage to a third party, covering a 
piano purchased under such conditions, or sells it to 
some third person, who buys innocently. In such a 
case the rule varies in different states. In the major- 
ity it is held that the buyer, having as yet acquired no 
title, can convey none. In others the conditional sale is 
treated as being fraudulent in its nature, and will not 
be strictly carried out when the rights of third parties 
intervene. In such states the innocent purchaser gets 
a perfect title. 

2. Sale on Condition that the Buyer shall be pleased; 
Time Stipulations. — Sometimes goods are sent on 
approval, or on condition that they shall please the 

161 



162 SALES 

buyer. In such a case the title does not pass to the 
vendee unless he has signified his intention to take the 
goods, or has permitted a reasonable time to elapse. It 
follows that he will not have to pay for them until 
one of these two conditions has been complied with. 

With respect to time stipulations there is more dif- 
ficulty. If it has been agreed that the goods are to 
be delivered by a certain time, it is always necessary to 
determine whether the parties really intend the time 
element to be a part of the contract. When we dis- 
cussed this question under the subject of contracts, we 
there saw that where A sold B a ship, "then in the 
port of Amsterdam," the sale was held void because 
the time representation was deemed an essential term 
of the contract, and it had not been complied with. 
You will also remember that where an actor agreed 
to present himself for rehearsal four days before the 
first performance and appeared on the scene only two 
days before, the court thought the stipulation was not 
an essential part of the contract. Exactly the same 
principles apply to sales. If the court is convinced 
that the parties intend the time condition to be an 
integral part of the contract of sale, then no title passes 
unless the condition be fulfilled. 

3. Effect of Failure to perforin Conditions Precedent. — 
The conditions thus far discussed may be termed "con- 
ditions precedent." They are so called because until 
they are performed the contract is not complete and, 
consequently, no title to property sold may pass. 
As long, therefore, as you have not performed a 
condition precedent, which you are by the contract 
compelled to perform, you cannot sue the other party 
for any breach. Conversely, if he has failed to perform 



CONDITIONAL SALES 163 

his condition, you are under no liability whatever to 
him. 

The performance of such conditions, however, may 
be waived. If you have purchased a suit of clothes 
which you expressly stipulate must be delivered by 
4 P.M. on Wednesday or you will refuse to accept them, 
and if the vendor fails to deliver by the appointed time, 
you need not accept them; but if you do, notwithstand- 
ing the lateness of delivery, you thereby waive the 
condition, and are bound thereafter. One may, either 
by express words, or as in this illustration, by con- 
duct, waive the performance of conditions precedent. 
If he has done so the contract will be valid in spite of 
the breach of the condition. But in the absence of 
waiver nothing will excuse from the performance. If 
you have agreed to deliver goods at a certain time, 
but are prevented by an earthquake or a great fire, you 
will not be excused on account of that ; you have broken 
your condition and lost your sale. 

4. Implied Conditions. — There are some conditions 
which, though not expressly agreed upon, have the 
effect of express conditions. One of these is said by 
some authorities to be the payment of the price, when 
no credit has been given to the buyer. If the parties 
have expressly agreed that no title will pass until pay- 
ment, then payment is undoubtedly a condition prece- 
dent and the case is precisely similar to the one 
previously discussed where goods are sold on the 
installment plan. It is said by some writers that, 
when no credit has been given, there is an implied 
condition that, as between the buyer and seller, the 
title is not to pass until payment. 

The theory of this conclusion is that if the sale is 



164 SALES 

understood to be for immediate payment, i.e., if no 
credit be given, then the parties must have meant to 
make the payment of the price a condition precedent, 
which must be performed before the title can pass ; if 
the contract of sale did not contemplate immediate pay- 
ment, then a credit is implied, and the title, of course, 
passes on delivery. It is very doubtful if this reasoning 
be correct. It is preferable to say that the title does 
pass and the seller has his remedy against the vendee. 

When goods are sold by description, it is an implied 
condition precedent that they shall conform to the 
description in kind and usually in quality. If you 
purchase from X a car-load of apples, you will not be 
obliged to accept oranges. Or if you bargain for 
Florida oranges and he ships you California oranges, 
you will not have to accept them, because he has not 
fulfilled his part of the contract; he has broken a con- 
dition precedent. As a general rule, the goods delivered 
must also be of a quality equal to the sample shown 
when the sale was contracted. 

5. Condition Subsequent ; Sale or Return. — Heretofore 
we have dealt exclusively with conditions precedent, 
the performance of which is necessary to the validity 
of the sale. We now meet a different kind of con- 
dition, known as a condition subsequent. Suppose A 
sells a horse to B, with the understanding that if it 
proves unsatisfactory it may be returned within one 
week. Within the week the horse dies without fault 
on B's part. The chances are that B will now find 
the horse unsatisfactory and will wish to repudiate the 
sale. The question here presented is whether the title 
had passed at once to B, or would not have done so 
until after the expiration of the week. This depends 



CONDITIONAL SALES 1G5 

upon the exact terms of the contract. If it stipulates 
that the title shall pass immediately, or if it clearly 
appears from the terms of the agreement that the parties 
did intend that the title should pass at once, then the 
sale is completed, and the provision for a return is a 
condition subsequent, — that is, a condition upon the 
performance of which the title will revert to the vendor. 
Viewed in this light, the title being in B, the loss 
would fall upon him, and he would be compelled to 
pay for the horse. Such contracts are, however, more 
frequently deemed to be contracts of bailment with an 
option to purchase. During the week the horse would, 
so to speak, be on trial. On this construction, the 
title would not pass until the time had expired or the 
purchaser had declared himself satisfied. In this case 
B would probably be allowed to repudiate his bargain. 



CHAPTER V 

WARRANTIES 

1. Express Warranties. — A warranty differs from a 
condition in that it is not an essential element of the 
contract. It is a collateral stipulation. Its breach 
gives rise to an action for damages, but does not dis- 
charge the contract. Warranties are of two kinds, 
express and implied. An express warranty is one 
which, as the name indicates, has been expressly agreed 
upon by the parties. You sell me a suit of clothes and 
warrant it to be ail wool. It turns out to be half 
cotton. The contract is not broken; the sale is good; 
but I may recover from you any damages which I have 
suffered by virtue of the breach of warranty. It is 
often very difhcult to tell whether a representation 
made by one of the parties is intended to be a condi- 
tion or a warranty. No absolute rule for determining 
can be laid down. The court will endeavor to ascertain 
the intention of the parties from the terms of the con- 
tract. If they intended it to be a term of contract, it 
is a condition. If they intended it to be a collateral 
stipulation, it is a warranty. Each case must be decided 
according to its own facts. 

2. Implied Warranties of Title. — It is not always 
necessary that the vendor shall use express words to 
create a warranty. In America, if a man sells property 
as his own, even though he makes no express repre- 

166 



WARRANTIES 167 

sentations about it, he impliedly warrants the title, 
i.e. agrees that if lie is discovered not to have been the 
owner, he will make good any loss accruing to the pur- 
chaser by virtue of that fact. The same rule holds good 
in England at the present time, though formerly the 
law was otherwise in that country. 

There are, however, some instances where the buyer 
is the one who assumes the risk of the title proving 
valueless. This is the case if he expressly takes this 
risk upon himself. It is also true where he purchases 
only the interest which the seller has. This transac- 
tion is an assignment rather than a sale. Again, if the 
purchaser at the time of the sale knows of a claim in 
the goods possessed by some third party, he buys at his 
peril. If they are sold at a time when they are not in 
the possession of the vendor, the title is at the risk 
of the vendee; lack of possession of the vendor should 
put the vendee on inquiry. Lastly, whenever goods 
are sold by the sheriff, or any person acting in an offi- 
cial capacity, he purports to sell only what the previous 
owner had ; therefore, the buyer cannot complain if his 
title is defective. 

3. Implied Warranty of Quality. — Where there has 
been a sale of specific goods which both parties have 
had an equal opportunity to examine, there is no 
implied warranty as to quality. The buyer is said to 
purchase at his own risk. " Caveat Emptor " — let 
the buyer beware — is the phrase which expresses the 
situation of the vendee. 

But if the goods are sold with the understanding that 
they are to conform to a sample shown, we have what is 
called a sale by sample, and there is then an implied 
warranty that the goods shall conform to the sample 



168 SALES 

both in kind and quality. The vendor in such cases is 
bound to allow the vendee a fair opportunity to inspect 
the bulk, and if he finds it unequal to the sample he 
may refuse to receive it. In this respect, the stipula- 
tion that the goods shall conform to the sample seems 
more like a condition than a warranty. When articles 
intended for food are exposed for sale in the market,there 
is an implied warranty that they shall be fit for human 
consumption. This rule is not recognized in England, 
and not everywhere in this country. It is confined to 
cases where the articles are sold directly to the con- 
sumer, not when they are sold to other dealers. 

4. Manufacturers' Implied Warranty. — When goods 
have been purchased from the manufacturer, he im- 
pliedly warrants their quality to the extent of guaran- 
teeing them to have no latent defects. While he does 
not by implication warrant his wares to conform to a 
certain standard, yet, even though the purchaser may 
have inspected the articles he is buying, the manu- 
facturer impliedly warrants them to contain no hidden 
defects arising from the process of manufacture. 

A sold B a large quantity of flower seeds. Both 
parties inspected them, but of course neither could tell 
whether the}^ would grow. They had been improperly 
cultivated, so that they were absolutely valueless. The 
court decided that the seller, who was also the producer, 
should make good the loss. Manufacturers also im- 
pliedly warrant the goods sold to be of their own 
manufacture and to be merchantable, — the latter, how- 
ever, only when the purchaser relies on the judgment 
and honesty of the seller. If the manufacturer knows 
for what purpose the buyer intends to use the article, 
he impliedly warrants it to be fit for that purpose. 



CHAPTER VI 

MUTUAL REMEDIES OF THE PARTIES 

1. Remedies of Unpaid Seller ; Right of Lien. — Having 
discussed the nature of the contract of sale, we shall 
briefly examine the various rights of the parties, in case 
one of them is in default. In the first place, we shall 
suppose the bu3'er to be the one who has failed to carry 
out his part of the agreement. The unpaid vendor has 
two classes of remedies. He has a remedy against 
the buyer personall}^, and he has certain rights over the 
goods themselves, notwithstanding the fact that the 
title to them may have passed to the vendee. 

If the title to the goods which are the subject-matter 
of a sale has passed to the vendee, a mental though not 
an actual delivery having taken place, the vendor is 
entitled to retain them in his own possession until he 
has been paid their price. This right to retain them 
until payment is called his "lien." It exists, however, 
only where the sale is for cash. If the vendor sells on 
credit he must, on the demand of the vendee, give up 
the goods provided the demand be made at a time 
before the credit has expired; if the demand is not 
made until after the credit has expired, then the vendor 
may hold the goods until payment, just as he may where 
the sale is for cash. 

If the vendor retains the goods by virtue of his lien 
and the vendee still neglects to pay, the vendor may 
sell the goods to some third party. It often happens 

169 



170 SALES 

that the continued retention of the goods would result 
in the loss of their value, as in cases where they are 
of a perishable nature. If the vendor could do nothing 
but hold them until the purchase money was paid, he 
would find himself with no security at all for its pay- 
ment. It is well settled in America that the vendor 
may exercise his right of "resale." When he does, he 
acts as the agent of the vendee. If he sells for more 
than the price the vendee agreed to give, he must pay 
the excess to him, less his own loss. If he sells for 
less than the price he was to receive, he is entitled to 
sue the vendee for the difference. 

2. Right of Stoppage in Transitu. — There is still 
another right over the goods which the vendor has, not- 
withstanding the fact that the title to them may have 
passed to the vendee. This is a peculiar privilege 
known as the right of ''''Stoppage in Transitu.^'' It has 
already been explained how a delivery of goods to a 
railroad or to any "common carrier," is a delivery to- 
the vendee and operates to pass the title; but even then 
the vendor has a right to retake the goods while they 
are on the way, if he does so before they have actually 
come into the possession of the vendee. This right 
may be exercised only when the vendee has become 
insolvent and the vendor would, in all probability, be 
unable to collect the price of his shipment. 

A, in New York, sold a bill of goods to B, in Rio 
Janeiro. They were shipped on the brig Betsy Jane. 
Two days after the vessel sailed, A was advised by cable 
that B had become a bankrupt. He thereupon author- 
ized his agent to meet the brig in the harbor of the city 
and to notify her captain, before the vessel came to 
anchor, not to deliver the goods to the consignee. This 



MUTUAL REMEDIES OF THE PARTIES 171 

was done, and B's assignee in bankruptcy, who could 
claim all of B's property, had no rights over the cargo. 
It is essential that the goods be intercepted in transitu. 
If they reach their ultimate destination before the order 
jeaches the carrier, the title has passed absolutely and 
the vendor has lost all his rights in the goods them- 
selves. It has been decided that if the vessel comes 
to anchor in the port of destination, the journey of the 
goods is at an end, and the order will then be too late. 

3. Remedies of Vendor against Vendee, Personally. — We 
have discussed so far only the remedies Avhich the 
vendor has over the goods which were the subject- 
matter of the sale, and the title to which had passed to 
the vendee, although they were still in the physical 
possession of the vendor. In cases where the title has 
not passed, obviously the vendor is at full liberty to do 
what he pleases with the goods. Until he is paid, he 
cannot be compelled to give them up. But now we 
come to the situation w^here the title has passed and the 
goods have been actually delivered into the possession 
of the vendee. In such a case the vendor has no 
remedy against the goods — he must sue the vendee for 
their price. If the vendee refuses to accept the goods, 
having decided to repudiate his bargain, the vendor 
may sue him, not for the price of the goods, for the 
title has not passed, but for damages arising from the 
breach of contract. He may recover a sum sufficient 
to compensate him for all the loss sustained on account 
of the breach, provided that loss could reasonably be 
expected to result from it. 

4. Remedies of Vendee where Vendor refuses to Perform. 
— We now reverse the situation, — suppose the vendor 
to be in default, and ask what are the remedies of the 



172 , SALES 

vendee. If the vendor has refused to perform his part, 
and the vendee has suffered loss in consequence, the 
latter may sue the former for damages for breach of con- 
tract. The amount recoverable is the amount of actual 
loss naturally resulting from the breach. If the vendee 
has been compelled to go into the market and pay a 
higher price for the same goods, he may recover the 
difference between the price which he actually paid, and 
the amount he would have paid had he bought accord- 
ing to the contracj:. 

Again, suppose that the contract of sale has been com- 
pleted so that the title to the goods has passed to the 
vendee, but that the vendor refuses to deliver them to 
him. If, in any case, one man is the owner of property 
and some one else wrongfully takes it from him or 
destroys it, or if, having possession of it rightfully, he 
wrongfully appropriates it to his own use, he may be 
sued for its value — he has been guilty of the wrong 
known as "conversion." If the title to goods which 
are the subject-matter of a sale has passed to the vendee, 
and the vendor wrongfully refuses to give them up, 
he has wrongfully appropriated to his own use property 
belonging to the vendee, and the latter may sue him and 
recover its full value, with damages for its detention. 

5. Suit for Specific Performance. — Another remedy 
which may be resorted to by the vendee, is a suit in 
equity for the specific performance of the contract of sale. 
This remedy is equally open to both parties, but, as a 
rule, damages will compensate a vendor for his loss, 
since all that he can lose will be the profits of the sale. 
But sometimes damages will not compensate the vendee, 
and, as we saw when we were discussing contracts, if 
damages will not compensate a man for a breach of 



MUTUAL REMEDIES OF THE PARTIES 173 

contract, he may go into equity and force the opposite 
party to carry it out specifically. This rule applies to 
contracts of sale, as well as to other contracts. If the 
article to be sold is of such a nature that damages 
cannot compensate the vendee for its loss, then he may 
specifically enforce it. 

B was a dealer in fish. The fish-skins and offal were 
valuable for the manufacture of glue. A offered to put 
up a glue factory and purchase all of B's fish, if the latter 
would enter into a contract to sell him all the skins 
and offal at a certain specified price for a long term of 
years. The contract was made, the factory erected, and 
all went smoothly until a third party came along and 
offered B a higher price. He then refused to sell to A 
any longer. A went into equity and asked for specific 
performance. The court granted it. They said no 
damages could compensate A for the loss of his busi- 
ness, and that would have been the result of B's 
continued refusal to perform, because no other fish- 
skins could be purchased anywhere within reach of A's 
factory. 

Whenever the article contracted to be sold is of 
peculiar value to the plaintiff, so that its loss cannot 
be compensated by money alone, the court will specif- 
ically enforce the sale. Thus, a sale of a valuable 
altar-piece, treasured as an heirloom, was enforced 
in equity by the vendee, who, being a member of the 
family in which the heirloom belonged, had a special 
reason for desiring to purchase it. Money alone would 
not compensate him for its loss. No other like it could 
be purchased. 

6. Remedies of Vendee for Breach of Warranty. — So far 
we have dealt only with remedies for a breach of 



174 SALES 

the contract of sale. But while that agreement has 
been performed, there may have been a breach of some 
collateral stipulation, termed a "warranty." If the 
sale has been completed and the goods delivered to 
the vendee, he may not, as a rule, tender them back and 
refuse to pay for them, upon discovering that they are 
not equal to the warranty. He may sue for damages 
for breach of the warranty and recover any loss suffered 
therefrom, or he may set up such damage in defence, 
when he is sued for the purchase price, and will then 
be required to pay the difference only. If the contract 
of sale has not yet been performed, that is, if the goods 
have not 3'et been delivered, and the vendee finds out 
by an examination of them that they do not equal in 
quality the sample to which tliey were to conform, or if 
he finds that they do not answer to the description given 
of them, he is then usually at liberty to refuse to accept 
them. He may do this, however, only in cases where 
the stipulation as to quality really partakes of the 
nature of a condition. In the case of an ordinary war- 
ranty, his only remedy is either a suit for damages or a 
reduction of the price by the amount of his loss. 



PAET IV 
NEGOTIABLE CONTRACTS 



CHAPTER I 



ESSENTIAL CHAEACTERISTICS OF A PROMISSORY 
NOTE 

1. General Nature of Negotiable Contracts. — Having 
completed the discussion of the general nature and for- 
mation of contracts and the more particular discussion 
of sales, we will now investigate '^negotiable contracts." 
These contracts are always written. They consist of 
"Promissory Notes "and "Bills of Exchange," usually 
termed drafts by merchants. Their peculiar feature 
is the fact that they may be transferred at will from 
one person to another. They circulate from hand to 
hand almost as freely as money, and this is what we 
mean when we use the word "neo^otiable." When one 
transfers a contract of this nature to some one else, he 
is said to negotiate it. 

2. Custom of Merchants. — The rules ^hich gfovern 
this particular class of contracts were, in the first 
instance, derived from a certain branch of law which is 
usually referred to as the "Custom of Merchants." 
When commerce began to be one of the most important 
means of livelihood, it became necessary that certain 

175 



176 NEGOTIABLE CONTRACTS 

rules or laws common to all countries should be laid 
down to govern transactions between merchants who 
lived in different sections of the world. A merchant 
in England trading with a merchant in Italy would, 
in case of a dispute between them, be sure to get into 
difficulties over the question as to which law was to 
govern the transaction. In order to obviate these dif- 
ficulties to some extent, the rules comprised in the 
" Custom of Merchants " were evolved. 

Among the most important of these rules are those 
which govern the purchase and sale of negotiable paper. 
When business men in different parts of the world are 
dealing with each other, they use bills of exchange and 
promissory notes almost exclusively for transferring 
values. While the common law now governs these 
instruments and the various situations which arise in 
connection with them, it is interesting to know that 
the common law decisions were originally based upon 
this peculiar system of rules which we have referred 
to as the "Custom of Merchants." Laws governing 
negotiable paper and other transactions which particu- 
larly concern merchant and merchant are, therefore, 
very much the same the world over, because the laws 
in all countries were founded, to a greater or less 
extent, upon this same system of rules. 

3. Definition of a Promissory Note. — Negotiable con- 
tracts consist of promissory notes and bills of exchange. 
The first thing to determine is what instruments are 
bills and what are notes. Having ascertained the char- 
acter of the paper, we are then in a position to apply 
the rules peculiar to it. A promissory note is a 
written, unconditional promise, made by one or more 
parties, to pay a certain sum of money to the order of 



CHARACTERISTICS OF A PROMISSORY NOTE 177 

some other party or parties, at a definite time. The 
one who promises to pay by affixing his signature to 
the instrument is called the "maker" of the note; the 
one to whom the money is to be paid is called the 
"payee." Hereafter when we refer to the man who 
promises we shall call him the "maker," and when we 
refer to the one to whom the promise is made, we shall 
call him the "payee." The usual form of a promissory 
note is as follows : — 



/ 500. 

Eight 11 

to- tk& avde 


MiUdalAkU. June 7 /8^ 9 

^onths a^jte^ cLat& I ^(yYyv'U.& to jo^a^y, 
n, af H. H. White, 


Five Hundred 


AattoA^. 


at the 


Merchants' Bank of Philadelphia 


with interest at 6%. 


lAUXkcyuZ cL 

M. 410. 


^j-a^l/^atCcyyv, fav v-a.l/ii& 
^e. 2/7/1900. 


John H. Waite. 







4. Note must contain a Promise. — We must discuss 
more particularly the essential elements of a promissory 
note, which are only briefly indicated in the definition. 
In the first place, it must contain an unconditional 
promise to pay. The point to be insisted upon is, that 
the words must constitute a promise of payment, as dis- 
tinguished from a request or a mere recognition of an 
existing debt. Thus, a written instrument saying, " I 
O U eight guineas," was decided not to constitute a 
promise, — it merely admitted the indebtedness of the 



178 NEGOTIABLE CONTRACTS 

signer. On the other hand, the words, " I O U twenty 
pounds, to be paid on demand," would have constituted 
a promise. The phrase " to be paid on demand " con- 
tains a clear indication that the maker of the note con- 
siders himself to be bound to pay at the instance of 
the opposite party. 

5. Promise must be Unconditional. — Not only must 
the promise be an actual promise as distinguished from 
a request, or an acknowledgment of indebtedness, but 
it must be an unconditional one. A paper reading, 
"I promise to pay one hundred dollars if my brother 
does not," would not constitute a promissory note. 
The promise is here conditional upon the failure of the 
brother of the maker to pay the amount. It is really 
an undertaking by one man to be surety for another. 
A gave B an instrument which read, "I promise to pay 
one hundred dollars out of the income of my farm." 
That instrument could not be a negotiable note. The 
promise was conditional upon the income arising from 
the farm ; there might be no income, in which case there 
would be no obligation to pay. 

6. Promise must be Single. — Not only musf; the note 
contain a promise which is unconditional, but it must 
contain no other promise or agreement on the part of 
the maker, beyond that of payment. To constitute a 
negotiable contract, the law requires that it shall con- 
tain but a single promise. It is, of course, entirely 
possible to have a paper which contains more than one 
promise and which will bind the maker; but such an 
instrument will not possess the character of negotia- 
bility unless it conforms in all respects to the essential 
elements which we are now enumerating. When we 
say a certain instrument is not a promissory note, we 



CHARACTERISTICS OF A PROMISSORY NOTE 179 

mean merely that it is not a negotiable instrument. A 
signed an instrument in Avhich he agreed to pay B the 
sum of five hundred dollars, and also to deliver up to 
B certain horses in his possession. The instrument 
was decided not to be a promissory note because it 
contained not only a promise to pay money, but also 
a promise to do something else, which destroyed its 
negotiability. 

7. Promise must be for the Payment of Money. — If the 
promise contained in the note is a promise to pay some- 
thing other than money, as a promise to deliver one 
hundred bushels of potatoes, the instrument is not 
negotiable. By " money " is meant the medium of 
exchange which is legal tender at the place where the 
note is to be paid. If I execute an instrument in 
which I agree to pay you one hundred Spanish milled 
dollars, that would not be a promissory note, as Span- 
ish milled dollars are not legal tender in this country. 
This contract would be an agreement to deliver a spe- 
cific chattel. The promise in the United States is 
ordinarily to pay in dollars, but a promise to pay spe- 
cifically in United States currency, or in silver dollars, 
or in gold dollars, would constitute a negotiable con- 
tract, for all of these are money, since they are legal 
tender in this country. A promise, on the other hand, 
to pay in the United States one hundred pounds of 
English money would not constitute a promissory note. 

8. Amount and Time of Payment must be definite. — The 
amount named in the note must be a definite one. 
There must be no uncertainty as to the obligation of 
the maker. If I execute an instrument by which I 
obligate myself to pay you five hundred dollars one 
year from date, and all other sums which at that time 



180 NEGOTIABLE CONTRACTS 

I may be owing to you, it would not be negotiable 
because the obligation of the maker is uncertain. If 
such an instrument were negotiable, that is, if it could 
circulate like money, it would give rise to a great deal 
of inconvenience, because the persons who might pur- 
chase it would not know how much it was worth to 
them. Inasmuch as such paper is intended to pass 
through the hands of a number of people, it should con- 
tain on its face an exact statement of its value. No 
article could be a successful medium of exchange unless 
this were true, because no one would know whether or 
not he could accept it in payment for value delivered. 
That is the reason business becomes practically bank- 
rupt when paper money which is in circulation becomes 
of doubtful value. Business men will not accept it 
because they do not know how much it is worth. If, 
therefore, the amount of the note, or the character of 
the promise, or the time of payment be uncertain, the 
law will not treat it as being a negotiable contract. A 
young man who had gotten into debt desired to raise 
money to discharge his obligations ; he was his father's 
heir, and gave a note to a money-lender in which he 
agreed to pay him a certain amount of money, " ten days 
after the death of my father." The note was not 
negotiable; for, while it was perfectly certain that the 
time would eventually arrive when the note would fall 
due, yet no one could tell how long a period might 
intervene prior to that day. 

9. Parties must be definite and Words of Negotiability 
present. — In order that all the elements of negotiability 
may attach, it must clearly appear upon the face of the 
instrument who is the payee and who is the maker of 
the note, otherwise, as you can readily see, there would 



CHARACTERISTICS OF A TROMISSORY NOTE 181 

be no means of determining its valne, as, after all, the 
chief point to be considered is the responsibility of the 
maker. 

Even if the preceding elements be present, still 
the obligation will not be negotiable unless there be 
words of negotiability; that is, words indicating the 
purpose of the parties that the paper shall be transfer- 
able from hand to hand. The usual words are, as may 
be seen from the form given above, "or order," or 
"pay to the order of," thus indicating that the maker 
agrees to pay to any one designated by the payee. Or 
the note ma}- read "Pay to John Smith or bearer," in 
which case any one who has possession of the note may 
collect it from the maker. It is not absolutely neces- 
sary to use these exact words, but some words indicat- 
ing negotiability must be present. 

When all these elements are combined in one instru- 
ment, we have what is technicall}- called a promissory 
note. As we shall see hereafter, there is a great differ- 
ence between the obligation of parties to an instrument 
which is technically a promissory note, and the parties 
to an instrument which is an ordinary promise to pay. 
In the one case the liability of the parties is governed 
by the peculiar rules which we have above referred to, 
founded upon the " Custom of Merchants "; in the other 
case their liability is governed solely by the common 
law rules relating to contracts. 



CHAPTER II 

ESSENTIAL CHARACTERISTICS OF A BILL OF 
EXCHANGE 

1. The Purpose of a Bill of Exchange. — We now come 
to the second kind of negotiable contracts, which are 
known as "Bills of Exchange." The purpose of a bill 
of exchange is to enable merchants in different parts 
of the world to pay for goods which they have pur- 
chased, without actually shipping the money to their 
creditors. If A, a merchant in New York, desires to 
pay various merchants in England for consignments 
of goods shipped to him, and should send the cash 
to each one, it would involve a great deal of trouble, 
as he would be obliged to purchase English money 
here, or else ship American money to England for the 
purchase of English money, Avith which to pay the 
debt. In either case he must bear the cost of shipment. 

To obviate this he makes a permanent arrangement 
with a banker, say in London. He deposits funds with 
him or obtains a " line of credit. " Then when he desires 
to pay for a consignment of goods, he sends to the foreign 
dealer a bill of exchange. This bill of exchange is a 
written order to his banker, directing him to pay to the 
order of X, the merchant, the amount of the bill. The 
latter then goes to the banker and presents the bill to 
him. If everything is correct and the banker has funds 
of the New York merchant for that purpose, he writes 
across the face of the bill "Accepted," with the date, 
and signs his name. He then puts aside enough money 

182 



CHARACTERISTICS OF A BILL OF EXCHANGE 183 

belonging to the New York merchant to meet this bill 
when due. When that date arrives he pays the amount 
named in the instrument. 

2. Essentials of a Bill of Exchange. — A bill of exchange 
may be defined as a written order by which A directs 
B to pay a certain sum of money, named therein, to the 
order of C. A, who signs the order, is called the 
drawer; B, the banker to whom the order is directed, 
is called the drawee until he accepts, after which he is 
called the acceptor. The party, C, to whom the money 
is to be paid is called the payee. Bills of exchange 
which are to be sent across the sea, or to far distant 
points, are usually issued in "duplicate " or in "tripli- 
cate." That is, three copies of the same instrument 
are executed, each one being numbered and containing 
a statement that if it be paid first, the other two are 
not to be paid. The one which first comes to hand is 
then used, and the others become of no validity. The 
usual form of such a bill is as follows : — ■ 



(Soo^kd'yiqe. lav £1000Stg. 



Fhiladelphia, Oct. 7 / 8 99 

Thirty days after sight gl tkU^ ^&<^cyyvd 

oi €90^^0,71(26 {iCioX^ cLnci tkiA^cL at QyaAyL& tem^cyb a/ytcl 
data icn^cLid) ^ouy to- tk& avd&v a( John Smith 
One Thousand Pounds Sterling lav v-auUo& 

v&^&vv-&d, dnd jiitou&& tk& QyCi'yyb& to- tk& d^is^o^nt ay 
^Q. M. M. Brown ^ Sons, ] 
Banhers, London, England. 



Henry Jones. 



cAa. 892 



184 NEGOTIABLE CONTRACTS 

The one given is No. 2. The others would be just like 
it, except the numbers. The observations which w^ere 
made concerning the essential characteristics of a 
promissory note, will also apply to a bill of exchange. 
It must contain an absolute order, not a mere request. 
" Mr. A will much oblige Mr. B by paying Mr. C one 
hundred dollars," would not be a bill of exchange. If 
the words "or order" were present, however, this 
would be deemed a sufficient indication of an absolute 
order, and the instrument would be negotiable. As in 
the case of the promissory note, the bill must be for 
the payment of money and the order must not be coupled 
with an order to do something else. It must be definite 
as to amount and time of payment and identity of the 
parties, and must contain words of negotiability. 

3. Bill or Note not Complete until Delivered. — A bill 
or note does not become binding until it has been 
delivered to the proper parties. Suppose I write out 
and sign a promissory note in your favor, but retain it 
in my own possession, intending to give it to you 
at some future time, when you are to deliver to me 
a sum of money. While the note is still in my posses- 
sion it is of no binding force upon me, as I have not 
really completed the execution of it until I deliver it to 
you. The same rule applies to a bill of exchange; 
until it is sent to the payee it confers no rights upon 
any of the parties. 

4. Ambiguous Instruments. — It sometimes happens 
that a paper is drawn in such a way that it is difficult 
to tell what it really is. In such a case the court will 
interpret the instrument as nearly as may be according 
to the intention of the parties. If it is of the opinion 
that they intended the instrument to be a bill of 



CHARACTERISTICS OF A BILL OF EXCHANGE 185 

exchange, it will so construe. If it is of the opinion 
that they intended it to be a promissory note, it will 
construe it to be one. A wrote an instrument in the 
following form, which he gave to C : — 

Oct. 9, 1901. 
ToB. 

I promise to pay to the order of C one hundred dollars, 
two months after date. 

(Signed) A. 

The question was whether this was a promissory note 
or a bill of exchange. It had been presented to B, and 
B had written his name across it, accepting. It was 
argued that A meant to order B to pay one hundred 
dollars to C, but that he ignorantly wrote, " I promise 
to " before pay, and these words should be disregarded. 
On the other hand, it was pointed out that the body of 
the instrument contained a clear promise to pay on the 
part of A, and the fact that the instrument was directed 
to B, and that he accepted it, made no difference. 
The court decided that the holder might elect to treat 
it as either, and as he had sued upon it as a bill of 
exchange, he was allowed to recover upon that theory. 

In both bill and note the essential words are the order 
or promise, the words of negotiability, and the signa- 
ture. Everything else may be dispensed with without 
destroying the negotiable character of the paper. The 
date may be proven by oral evidence ; if no 'time is 
stated in the instrument it is payable on demand. Even 
the name of the payee may be omitted, in which case 
the bill or note is payable to bearer, but the other 
characteristics must be present. 



CHAPTER III 

HOW THE ACCEPTANCE MUST BE MADE 

1. The Acceptance should be made in Writing across the 
Face of the Bill. — The bill of exchange should be pre- 
sented to the person to whom it is directed, the drawee. 
If he has funds of the drawer for that purpose he prom- 
ises to pay the amount, when due, and, to indicate that 
fact, writes his name across the face of the bill. This 
act is called his "acceptance." From that time he is 
called the "acceptor." Should the drawee for any 
reason fail or refuse to accept the bill, it is said to be 
dishonored, and the holder may charge the drawer with 
the amount. That phase of the question will be dis- 
cussed later; the question immediately before us is, 
How may the acceptance be made? 

It should, as a rule, be made in writing across the 
face of the instrument. This is not, however, always 
necessary. In England all bills of exchange must be 
accepted in writing. In this country different rules 
prevail in the different states. In Pennsylvania all 
bills of exchange for amounts greater than twenty 
dollars must be accepted in writing; but bills for a 
less amount may be accepted orally. Nearly all states 
have similar statutory rules. In some parts of this 
country a separate promise to pay a bill of exchange 
which has not yet been drawn up, will bind the 
acceptor. Suppose I wish to draw a bill of exchange 

186 



HOW THE ACCEPTANCE MUST BE MADE 187 

upon you, and I write you a letter asking if you will 
pay such a bill in case I draw it. You write back, 
saying that you will. I then draw up the bill, direct- 
ing it to you. That promise of yours will bind you in 
some states in this country, but not in others. In Eng- 
land it will not bind you. There are statutory regula- 
tions concerning this matter in a number of the states. 
2. What the Acceptance Means. — By the act of writ- 
ing his name across the face of the bill, the drawee 
promises to pay the amount. This promise is the 
essential part of the acce^Dtance, and *while the latter 
may be made in an informal manner, it must clearly 
contain this promise to pa}^ If the drawee accepts 
conditionally, he makes a conditional promise to pay, 
which may or may not destroy the negotiability of the 
instrument, depending upon its nature. If the drawee 
accepts before the date of payment, he promises to pay 
when that time arrives. If he accepts after the date of 
payment, he promises to pay on demand. The only 
proper person to accept a bill of exchange is the one to 
whom it is addressed, viz., the drawee; if a stranger 
should accept a bill he might be held responsible for 
his promise to pay, but the instrument would lose its 
negotiable character. 



CHAPTER IV 

HOW NEGOTIABLE PAPER CIRCULATES 

1. Indorsement Necessary. — It has already been 
pointed out that promissory notes and bills of exchange 
circulate from hand to hand almost as freely as money. 
This is the peculiar function of negotiable contracts, 
and they are made with the express purpose of perform- 
ing this service. There is, however, a difference be- 
tween the manner in which money circulates, and the 
manner in which negotiable paper circulates. Money 
changes hands and ownership merely by delivery. If 
I desire to pay you a debt of one hundred dollars and 
hand you one hundred dollars in United States cur- 
rency, the title to the currency passes to you by the act 
of delivery. It is not necessary for me to put my name 
on the paper or to go through a formality of any kind. 
But if I am the payee of a bill of exchange, and the bill 
reads : — 
_ , June 26, 1901. 

To A. 

Ninety days after date pay one hundred dollars to B, 

or order. 

(Signed) C. 

On the face of the instrument, B is the one who is 
entitled to the one hundred dollars. If B wishes to 
pay a debt which he owes X, and desires to pay it with 
this bill of exchange, he cannot simply hand the bill 
over to X, for if X should present the bill he could not 

188 



HOW NEGOTIABLE PAPER CIRCULATES 189 

get the money, as A is not ordered to pay it to him. 
But this is negotiable paper and does circulate from 
hand to hand. How, then, shall B get over his diffi- 
culty ? He writes on the back of the instrument, " To 
A, Pay the within to X or order, (signed) C." Or he 
may simply write, "Pay to X or order," or, in some 
cases, merely sign his name on the back. If he does 
the latter, he is said to indorse the bill or note in blank, 
and by so doing he orders the acceptor or maker, as the 
case may be, to pay the amount of the instrument to 
the bearer. The latter may, if he chooses, fill in his 
own name, so that it will appear that the original 
indorsement was made to his order. 

2. How the Indorsement should be Made. — When the 
holder of a note writes on the back of it an order direct- 
ing the maker to pay the amount to some other person, 
his action is called "indorsing" the note. His signa- 
ture on the back is his indorsement; by putting it there 
he has subjected himself to certain liabilities, which we 
will discuss later. After this time he is called an "in- 
dorser," and the one to whom he has indorsed the bill 
is called an "indorsee." 

The indorsement must be in writing on the bill or 
note. This is an absolute rule. If the indorsee wishes 
to transfer it to some other person, he may indorse it 
over to him in the same way, and the second indorsee 
may do the same to still another, and so on. The only 
person who can properly indorse a bill or note is the 
one who at that time is the owner of it. Obviously, 
this may be either the payee himself or some subse- 
quent indorsee, as no one else can be the owner and no 
one but the owner can transfer the title to another 
person. 



190 NEGOTIABLE CONTRACTS 

A. Irregular Indorsers. — It sometimes happens, how- 
ever, that a stranger to the instrument will put his 
name on the back of it to give it credit. Suppose a 
promissory note is executed in the following form : — 

Two months after date I promise to pay to the order 
of A two hundred dollars. 

(Signed) B. 

A wishes to negotiate, or, in other words, to sell the 
note, in order to raise funds. He offers it to W, who dis- 
trusts the credit of both A and B, and refuses to buy it, 
unless X will also put his name upon it. X, therefore, 
in order to give the note credit, signs his name on the 
back. A signs after him, and the note is delivered 
over to W. X's indorsement there is manifestl}^ irregu- 
lar. He was not the owner of the note at the time he 
signed, for, as his name appears before that of the payee, 
lie never could have had title to it. He is what is known 
as an "anomalous" indorser. There is a conflict of 
authority as to the liability of such indorsers. In Eng- 
land an anomalous indorser of a bill would be deemed 
to be in the position of the drawer of a new bill of 
exchange, and would be liable accordingly. The 
anomalous indorser of a note would not be liable at all. 
In America the rule varies in different states. In 
Massachusetts, if the anomalous indorser signs his name 
at the time the note is made, he is held liable as a joint 
maker. If he does not sign until some time afterward, 
he is chargeable as a guarantor of the credit of the 
maker, but not as an indorser. In some of the other 
states he is not chargeable at all, and in still others he 
is held to the responsibility of a second indorser. 



CHAPTER V 

LIABILITY OF THE MAKER OF A NOTE 

1. In General. — The maker of a note promises uncon- 
ditionally to pay the amount of its face to the payee, or 
any subsequent holder, at the date when the instru- 
ment is due, or at any time thereafter. His liability 
is absolute, and he can be discharged from it only by 
payment, or by the lapse of the statutory period of 
limitations, or by bankruptcy. This promise is uncon- 
ditional so far as the maker himself is concerned, but 
he is not compelled to pa}^, as a general rule, until the 
holder of the note presents it for payment and surrenders 
it to him. Inasmuch as the note is negotiable, if the 
maker should pay it without its being given up to him, 
he would run the risk of being compelled to pay it a 
second time. As we shall see later, it is no defence 
for the maker of a note to allege that he has already 
paid the instrument, if payment is now being demanded 
by a bona fide purchaser who gave value for it, provided 
he did not know that it had been paid, and if he had 
purchased it before maturity. 

A. Owner of a Lost Instrument may Recover in Equity. 
— It often happens that the owner of a bill or note 
seeks to recover from the maker or acceptor when he 
does not have it in his possession, by reason of the fact 
that it has been lost or destroyed. Take the case 
where the holder comes into court, proves that he was 

191 



192 NEGOTIABLE CONTRACTS 

the owner of a note, that the man whom he is suing 
was the maker, proves its amount, and that he has lost 
it, and asks for judgment. If he were permitted to 
recover, the maker might be compelled to pay the note 
a second time. It is possible that the bill may be found 
by some third party, who may sell it to some one else 
for a valuable consideration, and in that case the pur- 
chaser could recover against the maker. In most cases, 
however, the bill either has been destroyed or else it 
has been lost beyond all probability of its ever being 
found again. Under such circumstances, it seems 
unjust not to permit the one who is clearly entitled 
to the money to recover. At the same time, it does 
not seem fair to subject the maker to the risk of having 
to pay a second time. In order to reach as fair a 
result as possible, courts of equity, in some states courts 
of law also, will permit the owner of a lost instrument 
to recover, provided he has proven all the facts which 
have been indicated, and gives a bond by which he 
insures the maker against any loss on account of having 
to pay the note or bill a second time. Without 
giving such a bond of indemnity, however, the owner 
of a lost instrument is never permitted to recover. 

B. Liability of Joint Makers. — Thus far we have 
spoken only of the liability of the sole maker of a 
note or acceptor of a bill; that is, of the cases where 
one party only has signed the instrument. But sup- 
pose two persons, A and B, sign a promissory note, 
by which they obligate themselves to pay C a sum 
of money. This note may be what is known as a 
" joint " note, or it may be a " joint and several " note, 
depending upon the wording. If it reads, " we jointly 
promise to pay," or " we jointly and severally promise to 



LIABILITY OF THE MAKER OF A NOTE 193 

pay," the nature of the liability is perfectly clear. If 
nothing is said about the nature of it, the two parties 
having signed the instrument, it is a joint note. In 
some states statutes have been passed, providing that 
all notes signed by two parties shall be deemed to be 
joint and several notes, even though they may be ex- 
pressly declared to be joint. 

The distinction between the two involves the na- 
ture of the remedy. If the note be joint the makers 
make an indivisible promise to pay. There are 
several promisors, but only one promise. When the 
holder of the note sues, he may join all the makers as 
defendants or sue one only. As there is only one 
promise there may be only one suit; consequently, if 
he sues one, and subsequently finds him to be insolvent 
and therefore gets nothing, he cannot sue any other — 
his right of action is gone. But if the note be joint 
and several, each signer has made a separate promise to 
pay the full amount, as well as a common promise to 
pay in conjunction with his fellows; therefore the 
holder of the instrument may sue each one successively 
until he is able to collect the full amount. 



CHAPTER VI 

LIABILITY or THE ACCEPTOR OF A BILL OF EXCHANGE 

1. In General. — Until he accepts the bill of ex- 
change, the drawee is under no liability. The bill is 
an order to him to pay the amount to the payee, but 
until he signifies his willingness to do so, he is not a 
party to the contract. After he accepts, however, he 
is under an absolute responsibility to pay the amount 
of the face of the bill to the holder at maturity. If he 
fails at that time he must pay thereafter, with interest. 
If the drawer is compelled to take back the bill, by 
reason of the failure of the acceptor to pay it at matur- 
ity, the latter is under a duty to pay the drawer not 
only the amount of the bill with interest, but also any 
incidental expenses which he may have incurred by 
reason of the default of the acceptor. Sometimes the 
drawee accepts conditionally and not absolutely, as 
where one accepted "half in money and half in bills." 
In such a case he is responsible only according to the 
terms of the acceptance. 

A. Acceptor for "Honor." — The drawee is the only 
one who can accept a bill in the regular way. Some- 
times, however, it happens that the bill is presented 
to the drawee and acceptance is refused. The bill is 
then "protested," i.e., formally declared to be dis- 
honored by a notary public ; and the next step of the 

194 



LIABILITY OF ACCErTOR OF BILL OF EXCHANGE 195 

holder would ordinarily be to sue the drawer. But 
if X, a friend of the drawer, has reason to believe 
that the drawee will ultimately pay, and in the mean- 
time wishes to protect the drawer from suit, he may 
accept the bill "supra protest," for the honor of the 
drawer. This means that he agrees to pay the bill 
ultimately; if it is again presented to the drawee at 
maturity, and payment is again refused, it is again 
protested, and he is duly notified of these facts. 

As we shall see, when we discuss the secondary liabil- 
ity of the parties to instruments of this kind, viz., draw- 
ers and indorsers, there are a number of formalities that 
must be complied with in order to hold them. An 
ordinary acceptor, or maker, is the principal debtor and 
has absolutely bound himself to pay; consequently the 
observance of these formalities is not so essential. 
But if a man agrees to pay only in case some one else 
does not, he stands in the relation of a surety, and can- 
not be charged unless the proper formalities of pro- 
test and notice are observed. In the case before us, X 
is not the principal debtor. He has come forward to 
save the credit of the drawer, and has promised to pay 
if the drawee a second time refuses. If this happens, 
the holder is bound to have the bill promptly protested 
a second time, and to give due notice to the acceptor 
for honor, X. If he fails in any particular, X is dis- 
charged from liability. 



CHAPTER VII 

LIABILITY OF DRAWER AND INDORSEE 

1. Drawer and Indorser secondarily Liable, — So far, we 
have been discussing the responsibility of the parties 
who are primarily liable on a bill of exchange or promis- 
sory note. When we say a man is primarily liable, 
we mean that he is the principal debtor — the one who 
is bound both legally and morally to pay the amount 
owing. When we say a man is secondarily liable, we 
mean that he promises to pay, in case some one else 
does not. The drawer of a bill of exchange, and the 
indorser of a bill or note, are parties who are second- 
arily liable. The responsibilities of the drawer of a 
bill and the indorser of either a bill or note are prac- 
tically identical, and we may discuss them at the 
same time. It may be understood, when we use only 
one term for the sake of illustration, that the same 
principles will apply to the other. 

2. What the Drawer and Indorser Promise to Do. — When 
the drawer of a bill signs his name to the instrument, 
he promises the payee, and all subsequent holders of 
the bill, that the acceptor shall pay its amount at matu- 
rity, and agrees that in case the acceptor does not pay, 
he, the drawer, will do so, provided certain conditions, 
to be hereafter discussed, have been complied with. 
Suppose you own a bill, not yet due, which you wish 
to use in payment of a debt which you owe to A, 
and you therefore indorse the bill over to him. You 

196 



LIABILITY OF DRAWER AND INDORSER 197 

have not only transferred the ownership to him, but 
you have also agreed that he shall suffer no loss by 
reason of the default of the acceptor of that bill. In 
other words, you guarantee that the bill will be paid at 
maturity, with the understanding that if it is not, you 
will make good whatever loss may have been suffered 
by any subsequent holder. 

In the same way, A may indorse to B, and B to C, and 
C to D. Each indorser promises all subsequent indorsees 
that they shall suffer no loss by reason of default in the 
payment of the instrument which they have purchased. 
These parties, by the act of putting their names on the 
paper, agree that they will fully indemnify the holder 
and, if necessary, pay not only the face value of the in- 
strument, but also any expense which the purchaser may 
have incurred by virtue of the non-payment of the bill by 
the acceptor. It should be mentioned, in this connec- 
tion, that the holder of a bill or note may, if he chooses, 
pass the title to it without subjecting himself to any 
liability at all. He may do this by indorsing "without 
recourse." That is, by adding these two words after his 
signature. In such a case he has no liability at all. 

3. Conditions upon which the Brawer and Indorser are 
Liable. — The drawer and indorser are secondarily and 
not primarily liable, and their responsibility depends 
upon certain conditions, which must be faithfully per- 
formed by the holder. In the first place, the holder of 
the instrument must take it when due to the maker or 
acceptor, as the case may be, and formally demand pay- 
ment. This is what is known as "presentment." In 
the second place, it is necessary for the holder to send 
a prompt notice of the non-payment of the bill to the 
drawers or indorsers whom he intends to hold responsi- 



198 NEGOTIABLE CONTRACTS 

ble. If lie fails to give notice to them, they are entirely 
freed from liability. 

In order to determine what is a prompt notice, the 
court will take into consideration all the circumstances 
of the case. If the parties all live in the same city, and 
no good reason is shown why the notice should not be 
sent at once, only one day is allowed after the bill or 
note has been dishonored. If the parties neglect to send 
the notice on time, it is too late to charge the drawer or 
indorser. 

If the bill of exchange is a foreign bill, that is, if it be 
one drawn upon a man who lives in another country or 
another state, it must also be " protested " before the 
drawer or indorser can be held responsible. A " protest " 
is a formal statement which must be made by a notary 
public, and which sets forth the fact that the bill 
therein described has been presented for payment, and 
that payment has been refused, concluding with a formal 
protest, as it is called, against the bill, to which is 
affixed the signature and seal of the notary. It is not 
absolutely necessary for domestic bills of exchange to 
be protested, but the usual practice is that all bills of 
exchange and promissory notes shall be protested as soon 
as they are dishonored, for the protest is the best evi- 
dence of the fact of dishonor. If all these conditions 
have been complied with, then the drawer or indorser 
may be held responsible for the payment of the instru- 
ment, together with incidental expenses which the 
holder may have incurred by the reason of its non-pay- 
ment at maturity. 

4. Irregularity in the Instrument does not Excuse the 
Drawer or Indorser. — Subject to the performance of the 
foregoing conditions, the promise of the drawer or in- 



LIABILITY OF DRAWER AND INDORSER 199 

dorser is unconditional. It is an absolute promise 
made to subsequent holders of that particular instru- 
ment, that they shall suffer no loss by reason of pur- 
chasing the paper on which the drawer or indorser has 
placed his signature. Suppose I have in my possession 
a forged bill of exchange, which has been indorsed to 
me by some one else. Of course that instrument is of 
no value whatever, — it has no legal existence because 
it was never signed by the person whose name appears 
upon it. If I sell that instrument to you, placing my 
name upon the back as indorser, and you, after pre- 
senting it for payment (payment of course having been 
refused), seek to charge me for your loss, I will have to 
pay. Remembering that my promise to you is uncon- 
ditional, it is clear enough that I will be compelled to 
reimburse you for whatever you have paid for the bill, 
and any expense which you may have suffered. No 
irregularity in the written instrument which has oc- 
curred prior to the indorsement of the bill, will excuse 
the indorser from his promise to subsequent holders. 

5. Remedy of One Indorser against a Prior Indorser. — 
You will remember that each indorser promises all 
subsequent holders of the instrument that they shall 
suffer no loss by reason of the default of the princi- 
pal debtor. Each indorser, therefore (except the first 
one), while he is responsible to subsequent indorsees, 
has a remedy against any prior indorser. Suppose A 
is the maker of a note. B is the payee. B indorses 
to C. B then becomes the first indorser. C indorses 
to D. C is the second indorser. D indorses to E, and 
E to F. If F presents the note to the maker. A, on 
the proper day, and payment is refused, he may, by 
sending notice to E, hold him responsible for his in- 



200 NEGOTIABLE CONTRACTS 

demniiication. If F thinks either D or C or B a more 
reliable person than E, he may charge either one of them 
by sending the proper notice; for each indorser has 
promised to indemnify not only his immediate indor- 
see, but any of the subsequent holders who may suffer 
a loss. If F recovers against B, then C, D, and E are 
discharged from all responsibility. 

Now suppose F charges E, sues him, and recovers. If 
E has promptly communicated the notice to D he has 
a "remedy over," as it is called, against D. D then 
may indemnify himself by charging C, C by charging B, 
and B may recover the full amount from A, the orig- 
inal maker, provided, which is not likely, the latter is 
solvent. The maker's responsibility to B does not, of 
course, depend upon any conditions, and it terminates 
only with the statutory period of limitations. From 
this you can see the theory of indorsement of negoti- 
able paper. We have a sort of endless chain of liability. 
All except the maker of a note, or the acceptor of a bill, 
are only secondarily liable. Their responsibility de- 
pends upon the performance of the conditions to which 
we have referred. 

A. Presentment. — We will now take up more in 
detail the fulfillment of the various conditions which 
are necessary before the drawer or the indorser may be 
charged. We have already explained that presentment 
means taking the bill or note to the maker or acceptor, 
and formally demanding payment. It is also customary 
to present a bill of exchange to the drawee for acceptance. 
This step is not, however, absolutely necessary in order 
to charge the drawer or indorser unless the bill is one 
payable.at or after sight. In such a case, — and, indeed, 
most bills are so drawn, — presentment for acceptance 



LIABILITY OF DRAWER AND INDORSEE 201 

is a necessity. If a bill directed to A and signed "C," 
reads, "Pay B sixty days after sight one hundred dol- 
lars," that means that C, the drawer, does not order A 
to pay till sixty days after the bill is presented to him 
for acceptance, or sixty days after he has had "sight," 
i.e., has seen the bill. There is no liability in such a 
case until the bill is presented, — not even on the part 
of the drawer. Presentment for payment at the proper 
time and place is, however, in all cases absolutely nec- 
essary in order that the holder may preserve his remedy 
against the drawer and indorsers. 

B. To whom Presentment for Payment should be Made. 
— It is not necessary that the holder present the instru- 
ment and demand payment of the acceptor or maker 
personally. It is sufficient if it is presented at his 
place of business, to a clerk or other agent, or at his 
house, to his wife, or whoever may be found there. 
This is deemed a sufficient presentment, because if the 
acceptor or maker could not be there himself, he should 
have left funds with an agent to discharge the obliga- 
tion. If there are several joint acceptors or makers, 
who are not partners, presentment must be made to 
each one separately. If they are partners, presentment 
to one only is sufficient, for each partner is the agent of 
all the others. If the maker or acceptor has died prior to 
the date of the maturity of the instrument, present- 
ment for payment should be made to his executors or 
administrators. If none have been appointed, it may 
be made at his late residence or place of business. In 
any of these cases, if no one to make payment is found 
at the proper place, this is a sufficient dishonor of the 
instrument, as it is the duty of the acceptor or maker, 
or his representatives, to have some one there to pay. 



202 NEGOTIABLE CONTRACTS 

C. Place of Presentment. — If it is stated in the bill 
or note that it is payable at a particular place, pre- 
sentment must be made at that place. If you are the 
holder of a promissory note which reads, " I promise to 
pay one hundred dollars at the Merchants' Bank of 
Philadelphia," you would have to present that note at 
the Merchants' Bank. If you did not, you could not 
charge the indorser. If, as is generally the case, no place 
is mentioned in the bill or note, it should be presented at 
the place of business or at the residence of the principal 
debtor, z.e., the acceptor of the bill or the maker of the 
note. This is imperative — the presentment must be at 
the place of business or the residence ; even if made per- 
sonally at some other place, it is not a good presentment. 

A, who was the holder of a promissory note, started 
to go to the office of B, the maker, to present it for pay- 
ment. While he was on his way there, he met B on 
the street and asked him if he intended to pay the 
note; B replied that he could not. A then did not 
take the trouble to go to B's office, but immediately 
sent notice of the dishonor of the instrument to the 
indorsers. When he attempted to hold them responsi- 
ble for the payment of the note, they defended on the 
ground that there had not been a proper presentment 
to the maker, and the court sustained them in their 
contention. A should have gone on to the business 
place of B, and there made a formal presentment, even 
though he knew B was not going to pay. This may 
seem to be carrying a technicality too far, but you must 
remember that drawers and indorsers are only sureties 
and not the principal debtors ; the law therefore will 
excuse them whenever it can find a reasonable oppor- 
tunity for doing so. 



LIABILITY OF DRAWER AND INDORSER 203 

D. Time of Presentment. — In order to subject the 
drawer and indorsers to liability, the paper must be pre- 
sented on the day it falls due. If the presentment be 
made either before or after, and not on that day, they are 
discharged from all liability. In countries where days of 
grace are allowed, the presentment should be on the last 
day of grace. The number of days of grace allowed varies 
in diif erent countries — from three days usually allowed 
in the United States and in England, to thirty days 
allowed in some parts of Italy. In some states in this 
country days of grace have been abolished b}^ statute. 
If such is the case, the presentment of course should 
be made upon the day of maturity. 

If the day of maturity, Avhere there are no days of 
grace, or the last day of grace, where days of grace are 
allowed, falls on Sunday or any other legal holiday, 
presentment, according to the common law rule, must 
be made on the day before. In a number of states stat- 
utes provide that in such cases presentment ma}' be on 
the day after. If the note be one payable on demand, 
it is not expected that it will be presented for payment 
at once, else there would be no object in giving it; but 
it should be presented within a reasonable time. What 
is a reasonable time is determined by the court upon 
the circumstances of each case as it arises. Any time 
longer than the statutory period is always held to be 
an unreasonable time. If the statute of limitations 
provides that the right of action arising out of a simple 
contract shall be barred after six years, the presentment 
of a demand note six years after its date would cer- 
tainly be too late to charge the indorser. 

If there be some valid reason for delay in present- 
ment, whether the instrument be one payable on 



204 NEGOTIABLE CONTRACTS 

demand or not, it may be excused. If a state of war or 
a severe storm delays the mails, or if the note is lost, 
or the holder is too ill to attend to the matter, the pre- 
sentment may be good, even though it be made after 
the proper day. With respect to the hour in which 
the presentment must be made, it is well settled that 
it must take place during reasonable hours of business. 
If at a bank, during banking hours ; if at the maker's 
place of business, during business hours ; if at his resi- 
dence, at a reasonable time — certainly between sunrise 
and sunset. 

E. Notice of Dishonor. — If a bill is presented for 
payment, and payment is refused, it is absolutely nec- 
essary that prompt notice of the dishonor be sent to 
the drawer, and to all the indorsers whom the holder 
expects to hold responsible. A failure to send due 
notice will discharge them from all liability. The 
notice of dishonor consists of a sufficiently accurate 
description of the bill or note to identify it, a state- 
ment that it has been dishonored or unpaid, and the 
name of the sender. The notice is, of course, sent 
for the purpose of letting the indorser know that 
he is to be held responsible. It need not, how- 
ever, expressly notify him of that fact. The bare 
notice of dishonor is an intimation that he will be so 
held. 

F. Time of Notice. — If you have presented a bill or 
note for payment and it has been refused, you should 
immediately send notice of its dishonor to all the in- 
dorsers. This will permit you to charge which of them 
you choose at a later date. If you fail to notify them, 
you have lost that right. It is not absolutely neces- 
sary, however, to send notice at once. The rule is, if 



LIABILITY OF DRAWER AND INDORSER 205 

all the parties live in the same town, and the notice is 
delivered by hand, it should be sent on the next day. 
A failure to send it on the day following the day in 
which the party sending it is in a position to do so, 
will be negligence, and will discharge all the in- 
dorsers. When we say the day following the day in 
which the sender is in a position to forward the noti- 
fication, we mean that the holder of the note has one 
day following dishonor, the indorser whom he notifies 
has one day following the one upon which he receives 
notification, etc. If the notification is sent by mail to 
one in the same town, it should be sent so as to reach 
its destination on the next day. If the parties do not 
live in the same town, it is sufiicient if the notice of 
dishonor be sent by the post departing on the day fol- 
lowing. If it be a holiday, it is not counted, the day 
after the holiday taking its place. 

The whole theory underlying the doctrine of notice 
is diligence. The party seeking to charge the in- 
dorsers must not fail in any particular to send the 
notification promptly. If circumstances intervene 
which excuse the delay and remove the imputation 
of carelessness, then the failure to send prompt notice 
may be excused. If the holder does not know the place 
of residence of the indorser, but uses due diligence and 
yet fails to find it on time, he is excused for the 
delay and can charge the indorser nevertheless. Mere 
inconvenience, however, will not be a sufficient excuse. 
It has been decided that the illness of the wife of the 
one whose duty it was to send a notification would not 
excuse. As to the hour when the notice should be 
given, very much the same observations may be made 
as those which were made about the hour of present- 



206 NEGOTIABLE CONTRACTS 

ment. It should be at a reasonable hour — if at a 
business house, during business hours, etc. 

G. Place to which Notice should be Sent. — Just as in 
the case of presentment, the notice must be sent to the 
residence or place of business of the one notified. If 
it is sent by mail, the sender must properly address it. 
If it be sent to a large city, the street and number must 
be ascertained and added to the address. One excep- 
tion to this seems to be made in a case where a man has, 
in putting his name on a bill, appended the name of 
the city where he lives. There the indorser is thought 
to be justified in sending the letter to the exact address 
as indicated on the bill. If a man receives his mail at 
several different places, a notice sent to one will be 
sufficient. The whole theory is that one must be dili- 
gent. If he has done all that an ordinarily careful man 
would do under the circumstances, he is protected. 

H. By whom Notice should be Given. — The notice may 
be sent by any one who is or may be liable to pay the 
bill or note. Suppose A and B are respective indorsers 
of a promissory note. C is the holder, and, in case the 
note is unpaid, may charge B. As B can hold A if he 
has to pay the note, he is a proper party to send him 
the notification of the dishonor. If he does so, C may 
take advantage of that fact and sue A directly if he 
chooses. The only necessary incident is that A must 
have been actually informed of the dishonor by a proper 
person. If notice is sent by an outsider, or by a party 
to the bill who is not responsible, it is a nullity. If a 
drawer or maker sends the notice, it will not be good, 
because those parties are not holders of the instrument, 
and are in no way concerned with the liability of the 
indorsers. It is not necessary that the one who is 



LIABILITY OF DRAWER AND INDORSER 207 

sending the notice of dishonor should send it person- 
ally. He may do it through an agent. It is very 
common to deposit promissory notes with banks for col- 
lection. The bank is the agent of the holder, not only 
for the purpose of collecting the note, but also for the 
purpose of notifying the drawers and indorsers. Such 
a notice is perfectly good. 

I. To whom Notice should be Given. — Notice may be 
sent to the person to be charged, or to his agent. If 
there be joint indorsers, all should be notified. If the 
indorsers form a partnership, notice to one is sufficient. 
If the party sought to be charged is dead, notice should 
be sent to his executors or administrators (notice to one 
is sufBcient) ; if there are none appointed, the notice 
may be directed to the deceased at his late residence or 
place of business. If the one to be notified is a bank- 
rupt, the notice may be sent to him, or his assignee, at 
the option of the sender. 

J. Manner of serving Notice. — With regard to the man- 
ner in which notice must be sent, there are a few gen- 
eral rules. If the parties live or do business in the 
same town, the notice should be actually delivered by 
messenger, though this is not imperative. It may be 
sent by mail, but it should be mailed in time actually to 
reach the one to whom it is sent on the next day. If, 
however, the parties live at a distance from each other, 
and there is a mail service between their respective 
places of residence, the mail alone is ordinarily used. 
Service by delivery is always permissible, and is 
preferable if it can conveniently be made. 

6. When the Drawer or Indorser is Liable without the Per- 
formance of the Usual Conditions. — We have now briefly 
discussed the various conditions that must ordinarily be 



208 NEGOTIABLE CONTRACTS 

performed, before a drawer or indorser can be held 
responsible to perform his obligations. There are 
some cases, however, where the circumstances are 
such that this performance of conditions is unneces- 
sary. It sometimes happens that there is a special 
agreement entered into between the drawer and the 
acceptor of a bill of exchange, b}^ which it is pro- 
vided that the drawer shall be the principal debtor. 
Sometimes, also, it happens that the drawer has failed 
to deposit funds with the drawee, and consequently the 
latter refuses to accept the bill. In such cases it is not 
the drawee, but the drawer, who is really primarily 
liable. You will remember that the law requires a 
strict performance of the conditions mentioned before 
the drawer or indorser can ordiiiaril}^ be held respon- 
sible, for the reason that those parties are usually only 
sureties for the performance of the obligation of the 
principal debtors. But if the drawer or indorser is 
himself the principal debtor, there is no reason for 
the performance of these conditions, hence they are 
unnecessary. In the situation we have mentioned, the 
drawer or indorser can be charged without presentment 
and Avithout notice. 

The same rule holds if the drawer or indorser has 
waived the performance of the conditions. If, for in- 
stance, he has voluntarily agreed that he need not be 
notified of the dishonor of the bill or note, then the 
performance of this condition is unnecessary. In the 
same way, if a man indorses a bill which is a forgery, 
he is not only responsible to subsequent holders, but 
he is responsible to them without the performance of 
any of these formalities. Inasmuch as he has put his 
name upon a piece of paper which otherwise would be 



LIABILITY OF DRAWER AND INDORSER 209 

void, he is really the only debtor and, being primarily 
liable, is not entitled to notice. 

K Accommodation Paper. — One of the most common 
instances of a case where the drawer of a bill or the 
indorser of a note is primarily liable, is in the case of 
accommodation paper. Suppose you are desirous of 
raising one thousand dollars, but your credit is not 
good. You go to X, who is a well-known business 
man and a friend of yours who has confidence in you, 
and ask him to make a note for your accommodation. 
He, if he is thus willing to favor you, makes out a 
promissory note payable to your order, and signs it as 
maker. You then indorse the note over to some bank 
and receive the cash. This is practically a loan of 
money by X to you, only instead of lending you the 
money directly, he lends you his credit. Here, as 
between you and X, you owe the money. While the 
holder of the note could sue X and recover, because 
his name is on the paper as maker, yet you are the real 
debtor. If the note is presented to X at maturity and 
he refuses to pay, as he naturally would, the under- 
standing being that you would pay, the note is, of 
course, technically dishonored. The question is. Must 
the holder present the note and give notice of the dis- 
honor to you, or may he sue you without these for- 
malities? The latter is the rule. You are the real 
debtor, you are primarily liable, therefore you are not 
entitled to notice, and presentment and protest are 
unnecessary. The same thing would be true in a case 
where a man has accepted a bill for the accommodation 
of the drawer. The latter is chargeable without notice. 

L. Why Notice is Unnecessary when the Drawer or 
Indorser is primarily Liable. — The reason notice is 



210 NEGOTIABLE CONTRACTS 

required in all the cases above mentioned, is that 
the drawer or indorser sought to be charged has a 
remedy against his principal. If the drawer must pay 
the bill, he may in turn sue the acceptor. In the 
same way, an indorser may sue a prior indorser or 
the maker. The object of the notice is to enable him 
to take prompt measures to secure himself. The maker 
may be about to abscond. If the indorser is promptly 
informed of the fact of dishonor, he may take measures 
to prevent him from doing so. But where the drawer 
or indorser is himself the principal debtor, he has no 
remedy against anybody else. Consequently, there is 
no object in sending notice. That is the reason it is 
not required when the drawer or indorser is primarily 
liable. 

M. When the Drawer fails to Put the Drawee in Funds. 
— If a man draws a bill u^Don a drawee with whom 
he has made no arrangements for its acceptance, 
and in whose hands he has placed no funds, he is, 
in one sense, guilty of a fraud upon the payee; for 
even if he drew the bill with the best intentions, he 
has certainly been guilty of gross carelessness in fail- 
ing to make the proper arrangements with the drawee. 

Suppose you draw a bill on the X bank in London ; 
you have had no dealings with the X bank and have 
no funds there; the bill is drawn in favor of A, to 
whom you send it by mail. A presents the bill at 
the X bank and acceptance is, of course, refused. In 
such a case you are deemed to be the principal debtor, 
and may be charged without notice of dishonor. One 
exception may be made in a case where it appears, from 
all the circumstances, that the drawer might reasonably 
expect the drawee to meet the bill, as where the parties 



LIABILITY OF DRAWER AND INDORSER 211 

have had a long series of dealings with each other, and 
the drawee has been accustomed to honor bills drawn 
on him by the drawer, even if the latter's funds were 
temporarily low. 

N". Where a Special Contract has been Made. — Some- 
times a special arrangement is made between the 
indorser and the acceptor or maker, by which it is 
arranged that the former shall meet the bill or note 
when due. Suppose you are the maker of a note, and 
being about to go abroad for a protracted sta}^, leave 
funds in the hands of an indorser to pay it when due. 
He fails to notify the holder, the note is presented 
at your place of business at maturity, is protested for 
non-payment, and the indorser is sued without notice 
of the dishonor of the instrument. There, again, you 
see the indorser is the principal debtor. He became 
so when you put funds in his hands to meet the bill ; 
he is therefore not entitled to notice and may be sued 
without it. 

0. When Notice has been Waived. — If the drawer or 
indorser excuses the holder from the duty of pre- 
sentment and notice, he may be charged without the 
performance of these conditions. This waiver may be 
either by word of mouth or in writing, if made after 
the instrument was executed and before it had become 
due. But if the drawer, when he draws the bill, or 
the indorser, when he indorses the instrument, agrees 
to be liable without notice, he is making a contract 
different from the usual one implied by these acts. 
As his contract is in writing, he must put his qualifi- 
cation in writing, or it will not bind him. This is 
true by virtue of the rule that you cannot vary a 
written contract by oral evidence. If the note falls 



2l2 NEGOTIABLE CONTRACTS 

due, and a reasonable time for giving notice has 
elapsed, and yet the indorser promises to pay in 
spite of the fact, he may be held responsible. This 
promise seems to be based on no consideration and 
therefore void; nevertheless, the courts are uniform in 
deciding that, under such circumstances, it is binding. 



CHAPTER VIII 

KEGOTIATIONS OF BILLS AND NOTES 

1. Manner of Negotiation. — When we speak of nego- 
tiable paper, we mean paper that circulates with com- 
parative freedom from hand to hand, not necessarily as 
freely as money circulates, but, nevertheless, paper which 
gathers credit as it goes, instead of losing it, as would 
be the case with an ordinary contract. It is this 
quality that distinguishes bills and notes from other 
contracts. This chapter will be devoted to a dis- 
cussion of the manner and effect of their negotiation 
or passage from hand to hand. The manner of negotia- 
tion we have already discussed. You will remember 
that in a former chapter we saw that this paper is 
transferred by means of indorsement. This is the 
most common method. Some paper can be sold in no 
other way. Some, however, is so drawn that it may 
be transferred by delivery alone. This would be the 
case if a note or bill were made payable to the bearer. 

2. Negotiation Prior to Maturity. — From the stand- 
point of the parties, it is very important whether this 
negotiation takes place before or after the note or bill 
falls due. As we shall see later, the man who purchases 
a bill which should already have been paid, does so at 
his own peril, for he takes it with the knowledge that 
there is something wrong about it, otherwise it would 

213 



214 NEGOTIABLE CONTRACTS 

have been paid at maturity. Such paper is called 
"overdue paper." We shall first discuss the effect of 
negotiation prior to maturity. 

The great principle underlying the whole theory 
of the negotiability of bills and notes, is the princi- 
ple that whoever in good faith pays value for such 
an instrument takes it free from all personal defences. 
Suppose you buy a horse, fraudulently warranted to 
be sound, and give in payment your promissory note. 
You discover the horse to be unsound, return him to 
the seller, and repudiate your bargain. If the man 
who sold you the horse sues you on your note, you 
have a good defence, viz., that the horse was not sound, 
hence you have not received value for the instrument. 
But suppose, instead of suing you, he sells your note to 
A, who is ignorant of the fraudulent warranty, and 
who gives a good price for the instrument. The fact 
that you had received no consideration, or that you had 
been cheated, would not avail you as against A. You 
would have to pay. A, being what is called an " inno- 
cent purchaser for value," takes the paper free from all 
defences of that nature. 

As we have intimated, there are some defences that 
would be good even as against an innocent purchaser 
for value — good against anybody. We will first dis- 
cuss this class, and then we will take up the question 
as to who is an innocent purchaser for value, in order 
that we may see against whom the personal defences 
are available. The fact that the purchaser has not paid 
the face value of the instrument will be no defence 
whatever when he is suing the maker. You may have 
paid only five hundred dollars for a promissory note of 
one thousand dollars, but you are entitled to recover the 



NEGOTIATIONS OF BILLS AND NOTES 215 

full one thousand dollars. Such a possible contention 
must be distinguished from the defences which may be 
successfully urged. 

3. Absolute Defences. — All possible defences which 
may be set up to defeat recovery on a bill or note are 
divided into two classes, viz., "absolute" defences, 
which are good against all the world, and "personal" 
defences, which are good only against those who have 
actual or constructive notice of their existence. This 
means generally that they are good against only the im- 
mediate parties to the instrument. " Absolute " defences 
are so called because they attach to the thing itself and 
travel with it, no matter into whose hand it may come. 
They are of three kinds, based upon the incapacity of 
the parties to execute a contract, or upon the circum- 
stance that the contract is illegal and void, or upon the 
fact that the instrument sued upon has been extin- 
guished in law, and is therefore a nullity. If the de- 
fence set up is based upon any one of these three grounds, 
there can be no recovery, no matter who is suing upon 
the bill or note, for in each of these three classes of 
cases the instrument is as so much waste paper, — it 
has no legal existence. Such a defence does not, 
however, free the indorsers from their liability to 
indemnify the successive holders, as we have already 
learned. 

A. When the Maker or Acceptor is Incapable of executing 
a Contract. — If the maker of a note, or the drawer or 
acceptor of a bill, is incapable of executing a con- 
tract, then, obviously, the paper is of no validity, no 
matter into whose hands it may happen to come. Such 
incapacity may exist by reason of the fact that the 
maker of the instrument is an infant, a lunatic, or 



216 NEGOTIABLE CONTRACTS 

extremely intoxicated. The circumstance that the 
maker was a married woman constituted a disability at 
common law ; but in England, and nearly all the states 
in this country, this disability has been removed by stat- 
ute. We have already seen in our discussion of con- 
tracts that if a man is incapable of making a contract, 
his attempt to do so results in nothing at all, and the 
same principle naturally holds good for negotiable con- 
tracts. An infant or a lunatic has not the power to 
make a contract, and therefore promissory notes or bills 
of exchange executed by them have no legal existence. 

B. Negotiable Contracts Void if Illegal. — We have 
learned from our discussion of contracts that mere ille- 
gality does not always render a contract void. We 
learned further that where a statute specifically declares 
a contract to be void, or expressly forbids its creation, 
it is void absolutely. It follows that the mere fact that 
a bill or note is given for an illegal purpose will not 
render it invalid. As a general rule, illegality is not 
an absolute defence ; it is classed as a personal defence ; 
but if a statute is passed which specifically provides 
that bills or notes given in payment for certain kinds 
of debts, or under certain circumstances, shall be void, 
then such bills or notes can confer no rights whatever 
upon the persons who have purchased them. In the 
state of Pennsylvania an act has been passed which 
provides that promissory notes or bills of exchange 
given in payment of bets are void. No matter how 
innocent the purchaser of such a note may be, no matter 
how much he may have paid for it in good faith, he can 
recover nothing upon it against the maker. 

C. Extinguishment by Cancellation. — We have seen 
that if the bill or note never had a legal existence, it 



NEGOTIATIONS OF BILLS AND NOTES 217 

can confer no rights upon any persons whatever. If, 
though it once had a legal existence, it has been extin- 
guished, and in contemplation of law has ceased to exist, 
we may then apply the same rule. It can no more con- 
fer rights after being extinguished than if it had never 
existed. One of the most common methods by which 
extinguishment maybe brought about is by the cancel- 
lation of the instrument. If the holder intentionally 
destroys it, or cancels it by tearing off his name or 
di'awing his pen across it, this works a legal extin- 
guishment of it, and no rights can thereafter be acquired 
under it. If the cancellation was done accidentally, 
although the paper may be no longer in existence, the 
contract is not extinguished, and, as has already been 
pointed out, if the holder of a bill or note has accident- 
ally lost or destroyed it, he may recover, even though 
he is not able to produce it, provided he gives the 
proper bond of indemnity. 

D. Extinguishment by Alteration. — Any intentional 
material alteration made by the holder, or by his orders, 
without the consent of the other parties, will vitiate 
the instrument. By a material alteration is meant any 
alteration which changes the terms of the bill or note 
in a way to affect the rights of the parties. Alterations 
of the date, time of payment, amount of the face of the 
instrument, rates of interest, the names of any of the 
parties, i.e,^ payee, maker, drawer, or acceptor, chang- 
ing the wording so as to make a non-negotiable instru- 
ment negotiable or viee versa, changing a joint to a joint 
and several liability (except in states where all joint 
makers are by statute to be deemed joint and several), 
etc., are all material alterations. Innocent alterations 
by the holder, even though material, will not destroy 



218 NEGOTIABLE CONTRACTS 

the note or bill. He may, providing his act was in 
perfect good faith, sue upon the instrument as it was 
originally drawn. Alterations which do not affect the 
rights of the parties are immaterial, and have no effect 
whatever. Alterations made by a stranger are con- 
sidered to be immaterial alterations; they may be 
disregarded, and the party may recover on the paper 
as it was originally executed. If an alteration is 
made with the consent of all the parties, a new con- 
tract is made, and the situation is precisely the same 
as if a new bill of exchange or promissory note had 
been drawn. 

E. Extinguishment by Release or Re-transfer. — The 
third way in which a bill or note may be extinguished 
is by means of a release by, or a re-transfer to, the maker 
or acceptor at, or after, maturity. The most common 
instance of this is where the holder delivers up the 
instrument to the acceptor or maker at maturity, on 
payment of the amount due upon it. When that has 
been accomplished the paper is legally a nullity, and 
if through some accident some one else should obtain 
it and put it again in circulation, the party primarily 
liable on it could not again be charged. If the acceptor 
or maker himself buys the note before maturity, it is 
not thereby extinguished, for he may himself again put 
it in circulation before it becomes due. But if he keeps 
it until maturity, then it does, at that time, become 
extinguished, unless it appears that at the time he 
purchased it the real title was in some third party. 
If the person from whom he purchased was not the 
real owner, payment before maturity will not pro- 
tect the maker or acceptor, because a payment before 
maturity is not in the regular course of business. The 



NEGOTIATIONS OF BILLS AND NOTES 219 

holder, therefore, if he is the party liable on the instru- 
ment, is not accorded the same protection that would 
be given to him if he were a third party who purchased 
in the regular course of business, even though his 
transferor were not the true owner. 

As has been explained, it sometimes happens that 
parties other than the maker or acceptor are the ones 
primarily liable on the paper, e.g.^ the payee and first 
indorser of a note made for his own accommodation. 
The question may arise whether a re-transfer of the 
instrument to such a party will operate as an extin- 
guishment. Some doubt as to this point has been 
expressed by various writers, but it is now pretty well 
settled that pajanent at maturity, by an accommodated 
drawer or indorser, and a re-transfer of the instrument 
to him will operate as an extinguishment. But a 
re-transfer to, and payment by, an ordinary drawer 
or indorser will not work an extinguishment of the 
paper. It may be negotiated further, and the drawer 
or indorser who holds it may sue the acceptor or maker 
upon it. In order ip make the re-transfer it is not 
necessary that the paper be indorsed. A mere delivery 
of it to the party primarily liable operates in law as an 
extinguishment. 

4. Personal Defences. — The defences which we have 
discussed are good against any one, no matter whether 
he is an innocent purchaser for value or not. We now 
reach a class of defences which are good only when the 
party seeking to recover on the note has had actual or 
constructive notice of the existence of the defence, or 
when he is one who has given no value for the instru- 
ment. That is to say, if the plaintiff is what we call an 
innocent purchaser for value, none of the defences which 



220 NEGOTIABLE CONTRACTS 

we are now about to take up will be available against 
him. 

We will first investigate the kinds and nature of these 
"personal " defences, and then we will ascertain exactly 
what is meant by the phrase " an innocent purchaser for 
value." What we may denominate personal defences 
are those which are peculiar to the individuals who 
make the contract, which do not travel with the thing 
they affect, like absolute defences, but are good only 
as between the original parties, or as against others 
who stand in no better situation. 

To revert to an illustration cited earlier in this 
chapter: Suppose A sells B a horse, warranted to be 
sound. B gives in payment a promissory note. The 
horse turns out to be unsound, B returns him to 
A and repudiates his bargain. A sues him on the 
note. He cannot recover. Why? Because B has a 
good defence, viz., that A had made false representa- 
tions to him about the horse, and thus had obtained 
the note by fraud. But suppose A sold or negotiated 
the note to C. Now, you see the defence of fraud is a 
defence which does not in any way concern the note 
itself; there is nothing on its face which would lead 
any one who was about to purchase it, to believe or 
to suspect that any fraud had been committed. The 
defence is one not against the note itself, but against 
a recovery by A personally, by virtue of the fact that 
he has been guilty of fraudulent conduct. 

Whether C can recover or not depends upon two cir- 
cumstances. First, whether he knew at the time he 
purchased it of the fraudulent warranty by A; and 
second, whether he gave value for the instrument. If 
he did not know of the fraud, and if he did give value, 



NEGOTIATIONS OF BILLS AND NOTES 221 

then he may recover. If either condition fails, he 
cannot, because, if he either gave no value or knew 
of the fraud, he stands in no better situation than A. 
This explains the nature of what are known as per- 
sonal defences. This is the great advantage which 
negotiable contracts have over all others. They are 
not hampered by such defences as these. 

F. Fraud and Illegality. — We have already suffi- 
ciently explained the nature of fraud: it is always 
a personal defence. Whenever one party has induced 
another, by means of false representations, to execute a 
bill or note, he is guilty of fraud and cannot recover 
against him. But any subsequent innocent purchaser 
may do so. 

Illegality has also been thoroughly discussed under 
the subject of contracts. As we intimated when speak- 
ing of absolute defences, if an act of legislature pro- 
vides that a certain class of contracts shall be void, 
then, of course, no rights are conferred by them. But 
suppose A rents a house to B to use as a distillery, 
the intention being to manufacture whiskey without 
paying the taxes provided for by the internal revenue 
laws. In payment of rent, B gives A a promissory 
note. As between A and B, A could not recover, 
because he has made an illegal bargain; but if A 
sold the note to a third party, who knew nothing 
of the purpose for which the note was given, and 
who paid value for it, this third party might collect 
its amount. 

G. Payment before Maturity. — As already partially 
explained, payment before maturity is a personal and 
not an absolute defence. If the note is paid at 
maturity and is not delivered to the one primarily 



222 NEGOTIABLE CONTRACTS 

liable on it, and is a second time put in circulation, 
there can be no recovery, for a reason which will be 
explained when we take up the subject of overdue 
paper. But payment before maturity is no defence, if 
the note again be put in circulation and comes into the 
hands of an innocent purchaser for value, prior to the 
day on which it falls due. When a maker or acceptor 
pays a note or bill under such circumstances, — and in 
fact always, — he should demand and insist upon having 
the instrument delivered up to him. He cannot be 
compelled to pay, if it is not so delivered, unless the 
plaintiff will give a bond of indemnity to save him 
from all loss. 

H. Duress. — In the section of this book relating to 
the subject of contracts, we discussed the nature of what 
is known as duress. It is very similar to fraud, and is 
the same kind of a defence. As against the party who 
was guilty of the act of duress, it is a perfect defence ; 
as against a party who is an innocent purchaser for 
value, it is no defence at all. 

I. Absence of Consideration. — Absence of considera- 
tion is a good defence as between the original parties, 
and as against any plaintiff who has had notice. If, 
however, the note is an accommodation note, the one 
primarily liable may be held by any third party, even 
though he may have had notice. The reason for the 
distinction between the case where the note is given 
intentionally without consideration, z.e., for the accom- 
modation of the payee, and where it is given with the 
intention of receiving consideration, though none is ever 
actually received, is as follows. Where the note is an 
accommodation note, the maker agrees, by the very terms 
of his contract, to pay to any third party (though not 



NEGOTIATIONS OF BILLS AND NOTES 223 

to the payee) the amount of the note at maturity, 
without any consideration. This being true, it is 
thought just that he should be compelled to pay at the 
instance of any third party, even though that third 
party may have had notice of the nature of the contract. 
But if the payee demands the money, the lack of con- 
sideration is a good defence. 

If the note is not an accommodation note, but no con- 
sideration is actually given, the defence is good, as 
against the payee and all who are not innocent pur- 
chasers for value. A gave B a note for one hundred 
dollars, the understanding between them being that B 
would allow A one hundred dollars' worth of credit at 
his store. B refused to allow the credit. After his 
death his executors sued A on his note. The court 
refused a recovery. The defence of no consideration 
was held good. 

J. Failure of Consideration. — Failure of considera- 
tion differs from lack of consideration. Lack of con- 
sideration means that no consideration ever passed be- 
tween the parties. Failure of consideration means that 
a consideration was given, but that, for no fault of the 
maker of the instrument, it has turned out to be of 
no value. A sells B a lot of ground, in payment for 
which B gives a promissory note. It turns out that the 
title which A gave is valueless — the consideration has 
failed. This is a good defence as against the original 
party to the contract, or any one not an innocent pur- 
chaser for value. 

5. Peculiar Rules governing the Transfer of Title of Nego- 
tiable Paper. — Having discussed some of the defences 
known as personal defences, we will try to ascertain 
against what persons such defences are available. We 



224 NEGOTIABLE CONTRACTS 

have already learned that they are good as against any 
one not "an innocent purchaser for value." An inno- 
cent purchaser for value stands in a peculiar position. 
As a general rule of law, one who has no title can give 
none. If you steal my horse and sell him to A, I can 
go to A and reclaim him, or if A has sold him again, I 
may force A to pay me his value. Why ? Because the 
horse never ceased to be mine. You get no title by 
your theft, hence you can give none to A. But the 
rule is different with property which the law wishes to 
circulate freely. If you steal my money and use it in 
paying a debt to A, I cannot reclaim it, because from its 
nature the title will pass to any one who gives value in 
exchange. Very nearly the same principles apply, by 
virtue of "the custom of merchants," to commercial 
paper. If I lose a note which is transferable by deliv- 
ery and it is sold for value to you, you become the 
owner and may sue the maker. You acquire a title 
because you are an innocent purchaser for value, in 
spite of the fact that the one who sold to you had no 
title. 

6. An Innocent Purchaser for Value must Purchase in 
the Regular Course of Business. — We now come to the 
question, Who is an innocent purchaser for value ? 
The first essential is that he must be a purchaser in the 
regular course of business. If the paper is transferable 
by delivery alone, then delivery is sufficient. If not 
transferable by delivery, it must have been properly 
indorsed by one who was the legal owner at that time. 
The greater number of cases where a purchaser for 
value, without notice, gets a title good against some 
one else equally entitled to it, are cases where the 
paper is transferable by delivery. In all other cases 



NEGOTIATIONS OF BILLS AND NOTES 225 

but little, if any, opportunity arises for such a result. 
If the indorsement is made by one incapable of making 
it, the purchaser gets no title at all, e.g.^ if the indorse- 
ment be made by a lunatic or an unauthorized agent. 
If it is a forgery the indorsee gets no title. All steps 
in the transfer must be regular before the transferee 
becomes a purchaser at all. 

7. Purchaser must have Given Value. — The second 
essential element of an innocent purchaser for value is 
that he shall give value for the instrument. This does 
not mean that he must pay in mone}^, or its equivalent, 
the actual value of the instrument, but that he must 
have parted with something of value in exchange for it. 
You remember when we were discussing contracts, we 
dwelt for some time on the nature of consideration, and 
we saw that consideration consists of any benefit at all 
to the one party or any detriment to the other — and by 
benefit and detriment we meant such as might be meas- 
ured or expressed in money value. 

About the same principles may be applied to ascer- 
tain what is meant by value in this connection. If one 
gives money or other negotiable securities, or enters 
into liabilities of any kind, in consideration of the sale 
of negotiable paper to him, he pays value for it. If he 
agrees to refrain from suing a person against whom he 
has a cause of action, or does any act tending to preju- 
dice his own interest, he gives value. 

In cases where a promissory note, or bill of exchange, 
is transferred in cancellation of a preexisting debt, there 
is a conflict of authority. One view is that the pay- 
ment of a debt by a note or bill does not actually extin- 
guish the debt, but only suspends it until such time 
as it may be ascertained whether the bill or note is 



226 NEGOTIABLE CONTRACTS 

paid at maturity, when, if it is not, the original debt 
will revive; and that, such being the case, the creditor 
has suffered no detriment and therefore has given no 
consideration. The other view is, that whether the bill 
or note taken in payment of a preexisting debt is paid 
or not, the purchaser has either extinguished his debt 
altogether or has delayed prosecuting his remedy, and 
in either case he has given value. The latter seems to 
be the sounder view. If paper is given as collateral 
security for the payment of a preexisting debt, the 
transferee is not a purchaser for value. 

8. Purchaser must be Innocent. — Finally we ask. What 
do we mean by an "innocent " purchaser? By this we 
mean a purchaser who has no notice of any personal 
defences which might be interposed by the party liable 
on the paper. This notice may be actual knowledge, 
or what is known as "constructive " notice. Of course, 
if the purchaser actually knows or is informed that such 
a defence as fraud or duress is liable to be set up, he is 
not "innocent." It sometimes happens, however, that 
the purchaser does not actually know of these defences, 
but shuts his eyes to facts which he might have dis- 
covered by means of a little investigation. If he knows 
such facts as ought to put him on inquiry as to the char- 
acter of the paper with which he is dealing, but at the 
same time studiously refrains from making such an in- 
vestigation as any ordinarily careful man would make, he 
maybe charged with actual notice of the facts which, if 
he had used reasonable diligence, he might have discov- 
ered. When we say "charged with notice," we mean 
that he is presumed to have had actual notice, and will 
be treated as if he had had it. The purchaser is charged 
with " constructive " notice of all defences which could 



NEGOTIATIONS OF. BILLS AND NOTES 227 

be ascertained, or which would naturally be surmised 
from a perusal of the face of the instrument. Thus, 
a purchaser is charged with notice of the character of 
the indorsement, if the bill or note has been altered 
or mutilated in any way, or if there are unfilled blanks 
in it, etc. 

9. Overdue Paper. — This concludes our discussion of 
the negotiation of paper prior to maturity. We now 
take up the question of the effect of the negotiation of 
overdue or dishonored paper. It is obvious that if a 
man purchases paper which has already been dishonored, 
he is not an innocent purchaser. He is charged with 
constructive notice of the date of the bill, and therefore 
is presumed to know that it is overdue. Overdue paper 
may be transferred, but, with one exception, the trans- 
feree takes it subject to all defences that could have 
been urged against his transferor. Where the defend- 
ant, maker, or acceptor has a debt owing to him by the 
plaintiff's transferor, which he could have set off in 
an action by the transferor, that gives him no right to 
set off the debt in an action by the transferee. Aside 
from this one consideration, the purchaser buys at his 
own risk. 

Now, a word as to what is meant by overdue paper. 
If the note is payable at a particular time, it is overdue 
after the day of maturity. In countries where days 
of grace are allowed, the paper is not overdue until 
after the last day of grace has expired. Paper payable 
at no fixed time, but on demand, is overdue after 
demand, or, without demand, after the expiration of a 
reasonable time. 



CHAPTER IX 

CONFLICT OF LAWS 

A. How Rules conflict in Different States. — In connec- 
tion with the subject of bills and notes, and the rules 
which govern their negotiability, etc., it will be almost 
necessary to deal, at least briefly, with what is known 
as conflict of laws. It may happen that a bill of 
exchange is drawn in New York upon a man living 
in Pennsylvania, directing him to pay a sum of money 
to a third party, who lives in Delaware. The payee 
may negotiate the instrument in Maryland, and the 
parties, when they fall into a dispute about it, 'may live 
in New Jersey. The laws of New York, New Jersey, 
Pennsylvania, Maryland, and Delaware may not be uni- 
form on all questions coming up for decision, and the 
query naturally arises. What law is to govern? The 
law of one state will govern some questions and the law 
of other states, others — it depends on the precise nature 
of the point in dispute. In order that we may deal 
intelligently with such a case as the one we have 
indicated, it will be necessary for us to have some 
knowledge as to the law governing each question. 

B. Summary of Rules. — We will here append a brief 
summary as to which law governs each particular ques- 
tion that may come up for dispute. The law of the place 
where the contract is made, which in our illustration 

228 



CONFLICT OF LAWS 229 

is New York, governs all questions relating to the 
making of the contract. Whether the instrument is 
negotiable or not, and whether it is properly drawn up, 
are questions to be determined by New York law. The 
law of the state where the contract is to be performed, 
which in our illustration is Pennsylvania, governs the 
liability of the maker of a note or the acceptor of a bill. 
The law of that state also determines whether days of 
grace are allowed, and whether or not it is necessary to 
protest the bill for dishonor. The law of the state 
where the bill or note is indorsed, Maryland, governs 
the question as to whether the title has passed to the 
present holder. All questions relating to the transfer 
of the instrument are determined by the law of that 
state. Lastly, the law of the state where the action 
is brought. New Jersey, governs all questions con- 
cerning the admissibility of evidence, and all questions 
concerning the statutes of limitations, or any other stat- 
utory laws bearing upon the liabilities of the parties. 



CHAPTER X 

CHECKS 

1. A Check is a Bill of Exchange. — A check is a spe- 
cies of negotiable paper, differing slightly from both a 
bill of exchange and a promissory note. It is really a 
bill of exchange of a peculiar kind. It differs from 
the ordinary bill in that it must be drawn on a 
bank, it is payable on demand, and no acceptance is 
required. 

2. Liability of the Drawer. — The drawer of the check 
is liable for its payment, and no delay or failure to 
notify him will excuse him, except in so far as he has 
actually been damaged by the delay. Suppose you pay 
by check a debt which you owe to me. I am careless, 
and fail to demand payment within a reasonable time. 
Meanwhile the bank fails. I cannot charge you for the 
amount. I have lost it through my own carelessness and 
must suffer the consequences. But the mere fact that the 
payee of a check delays in presenting it until perhaps 
the drawer has withdrawn his funds, will not relieve 
the latter from liability. In order, however, to protect 
yourself from any possibility of loss, you should deposit 
a check as soon as you get it. 

3. Liability of the Drawee. — The drawee, the bank 
upon which the check is drawn, is not liable at all to 

230 



CHECKS 231 

the payee for its payment. The drawee of an ordinary 
bill is not liable until he has accepted, and, as has been 
said, the drawee of a check does not accept at all. The 
check is an order to the drawee, directing him to pay a 
certain amount to the holder of the check, using for 
that purpose funds belonging to the drawer; the latter, 
by his action in drawing the check, merely designates 
the bank as his agent to pay a certain sum to the payee. 
If the bank refuses to pay at a time when it has funds 
of the drawer for that purpose, and thus hurts his credit, 
it may render itself liable in an action of tort for the 
injury which it has done to him. But the payee has 
no right whatever to sue it for its failure to pay him; 
the payment of the check is a matter which lies solely 
between the drawer and the payee. 

4. Certified Checks. — If, however, the holder of a 
check takes it to a bank and has it certified, he then 
has a valid claim against the latter. When a bank cer- 
tifies a check, the proper officer, president or cashier, 
indorses it "Good," with his signature or stamp. 
This is equivalent to accepting it. At the time when 
a bank certifies a check, it sets aside sufficient funds 
belonging to the drawer to pay the amount mentioned 
therein. These funds then become the property of the 
holder of the certified check, and from that time he has 
a perfect cause of action against the bank. If at any 
subsequent time it refuses to pay his check on demand, 
he may sue and recover the full amount. The liability 
of the drawer ceases from the moment the check has 
been certified. 

6. Liability of Indorser. — If the check is indorsed 
to a third party by the payee, as it may be in the usual 
manner, the indorser guarantees the payment of the 



232 NEGOTIABLE CONTRACTS 

check in the same way that the indorser of a bill or 
note guarantees its payment, and his liability is sub- 
stantially similar. If he wishes to pass the title with- 
out subjecting himself to liability, he may indorse 
"without recourse." In such cases the effect of his 
indorsement is simply to pass title, — he himself is not 
in any way responsible for the payment of the check. 



PAET V 

CONTRACTS OF COMMON CARRIERS 



SECTION I 
CAREIEES OF GOODS 



CHAPTER I 

ESSENTIAL CHARACTEEISTICS OF COMMON CAERIERS 

1. Nature of a Public Calling^. — The contracts which 
have been discussed thus far concern only those persons 
who are directly parties to them. Such contracts may be 
called private contracts, as distinguished from those 
in which the public has an interest. It may seem 
strange that the public could be concerned in a con- 
tract between one man and another, but there are some 
kinds of contracts which, by their nature, do concern 
the public at large. If an individual, or a collection of 
individuals, exercises what is known as a public call- 
ing, if they offer to serve the public, the contracts 
which they make with the public, and the manner in 
which they exercise their obligations, must be, to a 
greater or less extent, controlled by law. An inn- 

233 



234 CONTRACTS OF COMMON CARRIERS 

keeper is one who exercises a public calling. He offers 
to house and feed any member of the public for a stipu- 
lated price. His obligations toward his guests are 
always regulated by law, and he is bound to receive all 
proper persons who apply to him. The public is suffi- 
ciently interested in the contracts which he makes to 
stipulate that any one of their number who comes to 
him with the proper price, and at the proper time, shall 
be accommodated. 

2. A Common Carrier exercises a Public Calling. — One 
of the most common examples of one who is engaged in 
a public calling is the common carrier. A man, or a cor- 
poration, carrying goods or passengers from place to 
place for a compensation, exercises a calling distinctively 
public. His business is to serve the public, his profit is 
derived from the public, and the public in general holds 
him accountable for his actions toward those of their 
number who have entered into contracts with him. 
The subject of common carriers therefore presents a new 
situation. We must first ascertain what are the rights 
and liabilities of this person whose business it is to 
serve the public, before we are able to interpret his 
contracts. 

3. Definition of "Common Carrier." — A common car- 
rier is "one who undertakes, for hire or reward, to 
transport the goods of such as choose to employ him, 
from place to place." One essential characteristic of 
the common carrier is that he offers himself to the public 
generally as a carrier of goods — that he stands ready to 
transport the merchandise of any proper person who 
applies to him and agrees to pay him his price. Another 
essential characteristic is that the carrying of goods must 
be for a consideration. One who enters into a special 



CHARACTERISTICS OF COMMON CARRIERS 235 

contract to carry your goods from one place to another, 
does not thereby render himself a common carrier, nor 
does a man who carries the goods of every one free of 
charge. The two essentials must be present to estab- 
lish this peculiar character. 

4. Distinction between Private Carrier and Common 
Carrier. — It is often very difficult to tell whether a 
carrier has become a common carrier or whether he is 
an ordinary private carrier. A, a farmer, was accus- 
tomed to draw his produce to a country town several 
miles away from his home. On his return trip he 
often carried parcels from the town to his neighbors, 
from whom he received a consideration. He was always 
willing to perform this service when requested. Hav- 
ing lost some of the goods which he was carrying, the 
question arose whether he could be held responsible 
as a common carrier. Ordinarily he could not, be- 
cause he did not hold himself out to the public as 
a carrier of goods. This was not his business, it 
being merely incidental to his journey to town that he 
carried parcels for his neighbors. It is very important 
to know whether a carrier is a common or private car- 
rier, because his responsibility, if he has lost some of 
the goods which he was carrying, is very different in 
these two cases. As we shall learn later, a private car- 
rier is not held so strictly to account for the safety of 
the goods as is the common carrier. 

5. Common Carrier need not Make an Unlimited Offer. — 
When we say that to be a common carrier one must 
hold himself out to the world generally as a carrier of 
goods, — we are now speaking of carriers of goods only, 
not carriers of passengers, — we do not mean that he 
must hold himself out as a carrier of all kinds of goods, 



236 CONTRACTS OF COMMON CARRIERS 

or as a carrier to all places. A man may engage in the 
business of carrying wheat from Philadelphia to New 
York, and be a common carrier. He would not be 
compelled to carry anything but wheat, nor between 
any points except Philadelphia and New York; and 
yet between those two places he is just as much a 
common carrier as though he stood ready to carry any- 
thing anywhere. 

Perhaps the main test as to whether a man is a com- 
mon carrier is whether his carrying is habitual or 
merely occasional. If it is habitual, the inference is 
that he holds himself out to the public as a common 
carrier; if it is only occasional, the inference is the 
other way. Some of the more frequent instances of 
common carriers are railroad companies, steamboat com- 
panies, and express companies. Any person or cor- 
poration making a business of carrying goods in the 
same manner as those we have mentioned, is a com- 
mon carrier. A tug-boat is not a common carrier, 
for it does nothing except tow other vessels ; nor is a 
railroad company a common carrier when it merely 
hauls a train belonging to another company. In order 
to be held to the responsibility of the common carrier 
in a particular case, the carrier must have entire con- 
trol over the goods which he is transporting. The 
fact that he does have such complete control over the 
goods explains, in a large measure, his strict account- 
ability. 



CHAPTER II 

DUTIES OF COMMON CARRIER TOWARD THE PUBLIC 

1. Duty to Carry for All who Apply. — The common 
carrier makes his living entirely out of the patronage 
of the public, and in return the law holds him to certain 
duties toward the public. The first of these is the duty 
to accept and transport all goods which are offered to 
him, provided the goods are those which he is accus- 
tomed to carry, provided they are in proper condition 
for transportation, and, lastly, provided he is paid the 
price of their carriage. If, when all these provisions 
have been complied with, the carrier refuses to trans- 
port the goods which are offered to him, he may be 
punished by being compelled to pay heavy damages to 
the person who has been refused. 

It should be noted, however, that when the goods 
tendered are not of the kind which the carrier holds 
himself out as being ready to transport, he is not com- 
pelled to accept them. An express company is not 
compelled to carry dogs. The proprietor of a line of 
stage-coaches will not be compelled to carry a box of 
dynamite. A railroad company could not be compelled 
to accept goods which are improperly packed, or de- 
livered to them in such condition that they would be 
damaged before the end of the journey, and thus subject 
the company to the liability of being sued for damages. 

237 



238 CONTRACTS OF COMMON CARRIERS 

Moreover, the carrier is not liable for his refusal to 
carry goods if, through no negligence of his own, he has 
not the facilities for doing so. It frequently happens, 
in case of a sudden rise in the price of wheat, that 
many thousands of carloads will be oft'ered for ship- 
ment to a railroad at the same time. If the company 
refuses to accept a portion of the wheat because it has 
not cars enough to carry it, no action will lie, on account 
of such refusal. In some states, if the company has been 
negligent in not providing sufficient cars, or rather in 
not providing as many cars as would naturally be ex- 
pected to be needed at that time, it is held responsible. 
This, however, is not the rule everywhere. 

2. Duty not to Discriminate. — Common carriers are 
also under an absolute duty to treat in the same manner 
all persons who become their customers. They cannot 
make unjust discriminations between parties who offer 
goods for transportation. They are at liberty to charge 
lower rates for larger contracts, but they are not at lib- 
erty to discriminate between individuals merely because 
of the personality of him who tenders the goods, or 
on account of the particular class of goods which is 
offered. If the carrier does make such discrimination, 
the injured party may apply to the courts for redress. 

Some states have gone so far as to pass laws prohibit- 
ing the railroad companies from charging different pro- 
portionate rates for " long hauls " and for "short hauls." 
These laws, however, have been held to be unconsti- 
tutional, and therefore void, because they interfere with 
the legitimate business of the railroad. The courts 
have decided that it is entirely just for the road to . 
charge a lower proportionate price for a long haul than 
for a short haul. 



DUTIES OF COMMON CARRIER TO THE PUBLIC 239 

One of the most bitter fights over this question was 
precipitated when the railroad companies attempted to 
discriminate against oil merchants who were not allied 
with the Standard Oil Company. Owing perhaps 
to some arrangement between this great corporation 
and the railroads, and very probably because a large 
amount of the stock of the railroads was owned by 
the corporation, higher rates were asked for oil offered 
for shipment by small companies than were charged for 
that offered by the Standard Oil Company. In some 
cases the railroads refused to ship the oil at all, alleg- 
ing that they had not sufficient cars, or that no siding 
could be put in at the points of shipment or deliv- 
ery, and other excuses more or less insincere. The 
courts decided in favor of the smaller oil producers, but 
the decision helped them very little, as there are a 
number of ways in which railroads can discriminate 
without really transgressing the law. One of the most 
common ways is a general regulation that no oil shall 
be carried except in cars belonging to the shipper. A 
huge corporation like the Standard Oil Company could 
afford to own its own cars, while smaller companies 
could not possibly do so. These rules, while not tech- 
nically a discrimination, really operate very much 
to the injury of the smaller companies. 

3. Duty to charge Reasonable Prices. — Railroad com- 
panies, in fact common carriers of all kinds, are also 
under a duty to the public not to charge exorbitant 
prices. It may seem as if it were an unwarrantable 
interference for the law to step in and dictate what prices 
they should charge, but when the public at large is inter- 
ested and the public welfare is directly at stake, the law 
does have the power to make such regulations. Laws 



240 CONTRACTS OF COMMON CARRIERS 

have been passed in many of the states of the Union, 
which fix a maximum charge for the carriage of freight 
upon the railroads within the limits of the state. If 
the law fixes the rate at an amount so low as to render 
the business of the railroad unprofitable, it will be 
declared unconstitutional because it destroys the busi- 
ness of the corporation; but as long as the maximum 
price named in the statute is, in the opinion of the 
courts, a reasonable price, the railroads are compelled 
to conform to it. In a similar manner, the rates of fare 
for cabs and street cars have been regulated in many 
cities. In some parts of the West the rates of storage 
to be charged by the owners of warehouses for storing 
grain are also fixed by law. 

In some parts of the country railroad commissions 
are appointed, who have general oversight of the busi- 
ness of transportation in the state. They see that 
reasonable prices are charged, reasonable regulations 
made, proper facilities offered, etc. This, perhaps, 
leads us to doubt whether we are not drifting too far in 
the direction of "paternalism," — a general term used 
to designate the policy of a government which closely 
regulates the business carried on within its borders. 
In many countries of Europe the governments own, 
and entirely control, the conduct of railways and simi- 
lar quasi-public corporations. 



CHAPTER III 

LIABILITY OF COMMON CARRIER 

1. When Liability Attaches. — The responsibility which 
attaches to the carriage of goods by a common carrier is 
much greater than that which attaches to the carriage 
of goods by one who is a private carrier. We first ask, 
When do these responsibilities as a common carrier be- 
gin? The liability of the common carrier begins as 
soon as the goods are delivered into his possession and 
accepted by him for transportation. The only point of 
difficulty which can arise in this connection is to deter- 
mine when the goods have been accepted. Sometimes 
this question is involved in more or less doubt. 

A took a box of goods to a railway station, intend- 
ing to send it by the next train. Finding no one at 
the station, he put the box on the platform, and went 
away, leaving it there. It was removed and lost, and 
the question arose whether or not the company had 
accepted the box for transportation. That would de- 
pend upon custom : if it was usual for boxes to be left 
at that place, and the company was accustomed to ac- 
cept them in that manner, it might be held responsible 
as a common carrier ; otherwise, it would not. If goods 
are left at the warehouse of the railroad company, with 
the understanding that they are not to be shipped for 
some days, the company is not a common carrier as to 

241 



242 CONTRACTS OF COMMON CARRIERS 

those goods until the time for shipment arrives. Until 
then he is simply the custodian of the goods, and as 
such is under a lesser liability, which is known as the 
liability of the "warehouseman." 

2. Common Carrier an Insurer of the Goods. — We may 
now inquire. What is the responsibility of the common 
carrier, presuming that it has been incurred? Suppose 
you deliver goods to a railroad company to carry from 
Chicago to New York. The goods do not arrive at 
New York, but are lost, no one knows where or how: 
Can you charge the company with the loss, or must you 
first prove that it was due to some fault on the part of 
its officers ? The latter is unnecessary. By the con- 
tract of carriage, common carriers absolutely agree that 
they will carry goods safely from the place where they 
are delivered to them to their destination. If they fail 
to do so, they are responsible for the value of the arti- 
cles, no matter how they may have been lost, subject 
to one or two exceptions, which we will take up here- 
after. The point here insisted upon is, that it is not 
necessary that the carrier be shown to be negligent. 
He is said to be an insurer of the safety of the goods, 
and is absolutely responsible. This responsibility 
attaches to common carriers by a rule of law, and they 
cannot relieve themselves from it without an express 
contract to that effect. 

3. Act of God. — There are, however, some few excep- 
tions to the general rule that a carrier is absolutely 
responsible for the safety of the goods which he carries. 
One of these instances is where the loss is incurred by 
an "act of God." The phrase "act of God" is used to 
indicate the agency of some superior power, which could 
not have been controlled by any means whatever. 



LIABILITY OF COMMON CARRIER 243 

Suppose an earthquake destroys a railroad train with 
the goods which are upon it, or a landslide buries it 
under its debris, or a tremendous storm causes a vessel 
to sink, — all these are "acts of God," because they are 
forces beyond the control of man. 

If, however, a vessel runs upon a hidden rock, situ- 
ated so that the accident was one impossible to be 
avoided, that disaster would not be deemed to have 
been caused by an "act of God." The distinction be- 
tween this case and the previous ones is not altogether 
obvious at first sight, but there is a distinction. In 
the one case the accident was caused directly by the 
superior agency. In the other, while the rock was 
no doubt placed at that point in the sea by an agency 
entirely superior to man, yet the vessel ran upon it, 
not by reason of any supernatural agency, but by the 
act of those who were steering it. Such a disaster is 
known as an inevitable accident, that is, an accident 
which could not have been averted; but it does not 
excuse the common carrier from his responsibilities. 
It is said by some writers that if such an accident 
occurs in an uncharted sea, the disaster would be 
deemed to have been caused by the act of God, but 
otherwise, if the rock should have been marked on 
the map. This distinction is shadowy and illogical. 
It is preferable to class such a case as an inevitable 
accident. 

4. Where the Carrier has also Been at Fault. — Even 
though the goods may have been destroyed by an " act of 
God," if their destruction was brought about in part 
through the negligence or unreasonable delay of the 
carrier, he is held responsible notwithstanding the ex- 
ception. If, by reason of his carelessness, the carrier has 



244 CONTEACTS OF COMMON CARRIERS 

unreasonably delayed his voyage so that he is overcome 
by a great storm, which he would have entirely escaped 
had he been on time, he would probably not be excused, 
even though his vessel was wrecked by the fierceness of 
the tempest alone. In the same way, if the captain of a 
vessel, instead of following the usual course marked on 
the chart, makes a deviation into an unknown sea and 
there meets with a loss on account of an "act of God," 
the carrier is responsible, because the real cause of the 
accident was the deviation from the course. 

5. Act of the Public Enemy. — Another exception is 
where the goods have been destroyed by an act of the 
public enemy. If the destruction of the property has 
been caused by an act of a hostile army invading the 
country, the loss falls upon the owner of the goods, and 
the carrier is not responsible. During the Civil War 
train-loads of goods passing from one point to another 
were frequently intercepted and destroyed by the armies 
of both sides. In such cases the carrier is not respon- 
sible. In the same way, if mobs destroy property in 
the hands of the carrier, he is as fully excused as if 
the loss had been incurred by an "act of God." 

6. Where the Shipper assumes the Responsibility. — 
Sometimes the owner of the goods does not surrender 
them into the entire custody of the carrier. He may 
think he knows more about how to ship them than the 
officials of the railroad, and perhaps goes with the goods 
in order to see that they shall not be damaged. In such 
a case, if they are lost without any negligence on the 
part of the officials of the railroad, the latter is not 
responsible. A man who wished to ship a wagon upon 
a freight car insisted upon putting it on the car himself, 
and, as he thought, braced the wheels in such a way 



LIABILITY OF COMMON CARRIER 245 

that it would not roll off. The wagon, however, did roll 
off in the course of transportation, and was destroyed. 
The shipper tried to hold the company responsible for 
its value ; but the court said, inasmuch as he himself 
had taken charge of the loading of the vehicle, and it 
was lost because of the defective bracing of the wheels, 
he would have to stand the loss himself. 

7. When Goods are destroyed on Account of their own 
Inherent Nature. — It would be most unjust to hold the 
common carrier responsible for the loss of goods which 
are shipped in such a manner that they cannot possibly 
reach their destination in safety. Assume a case where 
fruit is shipped for a long distance, having been 
improperly packed, and being on the point of decaying 
when it starts. Suppose that the railroad officials 
are not notified as to the character of the contents of 
the box, and it is shipped in an ordinary freight car. 
Of course, in such a case it is not possible that the 
fruit can reach its destination in good condition. 

Whenever a loss thus occurs by reason of the inherent 
nature of the goods themselves, and without any neg- 
ligence whatever on the part of the carrier, the latter is 
not responsible. The same rule applies when cattle 
are shipped alive, and injure each other by quarreling 
among themselves. When animals are so shipped, be- 
ing placed under unusual circumstances and in strange 
surroundings, they will almost inevitably fight with 
each other during the course of the journey. If, on 
account of this, some of them are killed or injured, the 
carrier is not responsible. So much risk is assumed 
by the shipper. 

8. Other Excuses for Non-delivery of Goods. — We have 
seen that if goods have been lost through an "act of 



246 CONTRACTS OF COMMON CARRIERS 

God," or an act of the public enemy, or on account of 
their inherent nature, the carrier is not responsible for 
his failure to deliver them to the consignee. There 
are ojie or two other instances in ^yhich the common 
carrier is also excused from fulfilling his contract. 
Suppose A steals a quantity of goods from X and ships 
them to B, the common carrier making a contract with 
A that he will deliver them safely to the consignee. If, 
before the goods are finally delivered into the possession 
of B, X appears and claims them by virtue of his supe- 
rior title, the common carrier cannot refuse to deliver 
the goods to him without subjecting himself to liability 
for their conversion. The carrier, therefore, is com- 
pelled to deliver them to X, and, consequently, is 
unable to deliver them to the consignee. In such a 
case he is excused for his failure to perform his con- 
tract. 

Another case in which the carrier is excused, is 
where the consignor has stopped the goods in transitu. 
You will remember from our discussion of this subject 
under the head of sales, tliat when the consignee has 
become insolvent, the consignor has the privilege of 
stopping the goods at any time before they reach the 
end of the journey. If he exercises his right, the carrier 
is excused from delivering to the consignee. Lastly, 
if the goods, while in course of transportation, have 
been seized by an officer under legal process, this 
excuses the carrier from the duty to deliver. 

9. Liability for Delay; Negligence. — Common carriers 
are not absolutely bound to deliver goods, shipped 
through their agency, at the exact time at which they 
agree to do so. It is recognized by the courts that for 
trains to be always on time is an utter impossibility. 



LIABILITY OF COMMON CARKIER 247 

A delay, therefore, wliicli is not due to any fault or 
negligence on the part of the common carrier does not 
subject him to liability; though if it has been caused 
by his own negligence, he is responsible. If he makes 
a special contract, by which he absolutely binds him- 
self to deliver the goods at a certain specified time, 
then he is bound to deliver them at that time. 

Thus far we have been discussing the peculiar lia- 
bility attached to the common carrier by virtue of his 
calling. Before closing the discussion of his liabilit}^, 
it should be remarked that he is alwaj^s responsible for 
his own negligence, as was indicated when we were 
discussing the "act of God," the "act of the public 
eneni}^," etc. If in such cases the carrier has been 
negligent, he is still responsible. 

10. Contracts limiting Liability. — It is customary, in 
fact it is almost universal, for railroads and other com- 
mon carriers to make special contracts with persons who 
ship goods through their agency. By these contracts 
they provide that they shall not be responsible beyond 
a certain snm, unless the value of the goods be declared 
beforehand; or that they shall not be liable at all, unless 
a claim is presented within a certain time or in a par- 
ticular manner; and sometimes they attempt to make a 
contract by which they shall not be liable under any 
circumstances whatever. You can see at a glance that 
if all carriers insisted upon always making such con- 
tracts as would absolutely free them from liability, the 
public would be forced to accept the situation, because 
goods must be shipped. The result would be that no 
common carrier would ever be responsible for goods 
which he lost. This would defeat the purpose of the 
common law rules fixing the liability of persons exercis- 



248 CONTRACTS OF COMMON CARRIERS 

ing this public calling. Consequently, the law has 
stepped in and has forbidden carriers to make contracts 
of certain kinds. Every one is aware that express com- 
panies always make contracts providing that they shall 
not be responsible beyond fifty dollars for goods which 
are shipped by them, unless the value of the goods is 
declared beforehand. Such contracts the law will sanc- 
tion. They will also allow the carrier to make a con- 
tract providing that a claim for damages must be 
presented in a certain manner and within a reasonable 
time. 

But the common carrier cannot make a contract 
by which its liability for the negligence of its servants 
is evaded. Unfortunately, there is one state which 
has so far departed from the just and equitable view 
of the common law as to hold that a carrier may stip- 
ulate against any liability for the negligence of its 
servants. This state, which stands alone in this view 
of the law, is New York. In other states, if an agree- 
ment is entered into by which the shipper provides 
that he will not hold the carrier responsible for acci- 
dents occurring through the negligence of its servants, 
this contract is void. In some states, any contracts in 
any way limiting the liability of the carrier are void. 

11. When the Liability Terminates. — Having seen what 
the responsibility of the common carrier is while he is 
carrying the goods, we next ask. When does this lia- 
bility come to an end? The short answer to this ques- 
tion is. It comes to an end when the goods are delivered 
to the consignee. The question which is sometimes 
difficult to answer is. When are they delivered? If 
they are personally delivered to the consignee, then, 
undoubtedly, the liability of the carrier is at an end. 



LIABILITY OF COMMON CARRIER 249 

Suppose the goods arrive safely at the termination of 
the railroad journey, and a notice is sent to the consignee 
that the goods are there, subject to his order. If the 
notice is properly sent, and the consignee does not come 
to claim the goods within a reasonable time, the liability 
of the company is at an end, and it is therefore re- 
sponsible only for its negligence. Its liability is 
the same as that which has been referred to as that 
of a "warehouseman," that is, the liability which the 
owner of a warehouse would be under for goods de- 
livered to him for safe keeping. In such cases the 
carrier is responsible for the manner in which he keeps 
the goods, but he is not responsible absolutely for their 
safe delivery. 

Sometimes, when goods are to be shipped over sev- 
eral different lines, the first carrier delivers them to 
a second carrier, the second carrier to a third, and so 
on, until they reach the end of the journey. In that 
case, when one carrier has delivered the goods to the 
next connecting carrier, his responsibility ceases and 
that of the next carrier begins. There are, however, 
a few states in which the first carrier is responsible, 
(unless there is a special contract freeing him from 
responsibility), even after he delivers the goods to 
the next carrier and until they are finally delivered to 
the consignee. 



CHAPTER IV 

RIGHTS OF THE COMMON CARRIER 

1. Right of Compensation. — Having seen what are the 
duties and liabilities of the common carrier, we now ask 
what rights he has to compensate him for all these 
arduous obligations. The first right is that of com- 
pensation for the services which he renders in carry- 
ing goods. It goes without saying that no common 
carrier will be forced to carry goods without being 
paid for it. He is entitled to a reasonable compen- 
sation, and he is not obliged to carry goods unless 
this compensation is given to him before he accepts 
them for transportation. As a general thing, common 
carriers do accept goods without payment in advance, 
but they are not required to do so. With regard to 
the amount of compensation, we have already seen that 
the common carrier cannot charge unreasonable rates ; 
on the other hand, it is also true that no law can be 
passed which unreasonably lowers the price which the 
common carrier may charge; and he is permitted to 
charge proportionately higher rates for short hauls than 
he does for long hauls. An act of Congress may regu- 
late the rates to be charged for through freight which 
passes from one state to another, but no state statute 
can in any way regulate rates except those which are 
charged from one point in the state to another point in 

250 



RIGHTS OF THE COMMON CARRIER 251 

the same state. This is true because the Constitution 
of the United States prohibits the states from inter- 
fering with interstate commerce. 

2. Right of Lien. — Practically, the only extraordi- 
nary remedy or privilege which the common carrier has, 
as compensation for his obligations, is the right of 
"lien." By this it is meant that if the common carrier 
is not paid in advance for the carriage of the goods, 
he may retain them in his own possession until he is 
paid. This privilege attaches to any kind of goods 
which he carries. It is really given to him in order 
to compensate him for the rule that compels him to 
accept goods from all who tender them. If he were 
not permitted this remed}'-, he would be at the mercy of 
persons whose goods he had accepted and who did not 
intend to pay him, and against whom he would perhaps 
have no other redress. As soon as the carrier has de- 
livered the goods, however, he has lost his lien, and 
has not thereafter any right over them. According to 
the rules of the common law, a carrier has no right to 
sell goods which he thus retains to pay him for the 
transportation charges ; but in nearly all the states in 
this country statutes have been passed which give him 
the right to sell after a reasonable time has elapsed. 



SECTION II 

CAEEIEES OF PASSENGEES 



CHAPTER I 

DUTIES TOWARD THE PUBLIC 

1. Who are Common Carriers of Passengers. — We have 
now discussed carriers of goods, their riglits and liabili- 
ties. A second class of common carriers are those who 
carry passengers. The common carrier of passengers 
holds himself out to the public as one wdio will carry 
all proper persons who pay the stipulated fare, between 
the places for which he has facilities for carriage. Very 
much the same tests which we applied to ascertain when 
a carrier of goods was a common carrier, may be applied 
to ascertain when a carrier of passengers is a common 
carrier. If he is one who makes a business of trans- 
porting human beings, and holds himself out to the 
public as one who is engaged in such business, he is a 
common carrier. Omnibus lines, street-car companies, 
stage-coach companies, railroad companies, ferryboat 
companies, etc., are common carriers of passengers. As 
in the case of carriers of goods, the carrier of passengers 
must be one who carries for hire. 

2. Who are Passengers. — All persons who ride upon 
the vehicle of the common carrier, with his consent, 

252 



DUTIES TOWARD THE PUBLIC 253 

are passengers, with the exception of those who are 
employed by him, and are there not in the capacity of 
passengers, but as workmen. While it is true that in 
order to be a common carrier of passengers one must 
be a carrier for hire, yet a man may be a passenger, 
although he has paid no money for transportation. A 
man who travels upon a pass, or is the guest of a rail- 
road official, is a passenger. A trespasser, however, is 
not, — such as one who steals a ride upon a train, and is 
there without the consent, either expressed or implied, 
of the railroad company. If a man attempts to ride upon 
a train by using a ticket which he has no right to use, 
he is not a passenger, and is practically in the same 
situation as a trespasser. An individual becomes a 
passenger as soon as he is accepted by the carrier for 
transportation. This is usually at the moment when he 
boards the vehicle. It is sometimes held, also, that one 
who is in the station of the carrier intending to board an 
incoming train is a passenger, even though he has as yet 
not stepped into the vehicle. 

3. To Accept all Proper Persons who Apply. — Just as 
the carrier of goods is bound to accept all proper goods 
which are tendered him for transportation, so the com- 
mon carrier of passengers is bound to accept as pas- 
sengers all proper persons who present themselves for 
carriage. When we say proper persons, we mean to 
exclude those who travel for the purpose of injuring 
the railroad, persons who are fleeing from justice, or 
persons who are traveling for any improper purpose 
whatever. If a man is so intoxicated that his presence 
would be obnoxious to the other passengers, he may be 
refused. It should be remembered, also, that the car- 
rier offers transportation facilities only for the purpose 



254 CONTRACTS OF COMMON CARRIERS 

of carrying people from place to place ; he is not, there- 
fore, obliged to accept any one who travels for the pur- 
pose of carrying on business while on the train. If a 
man intends to sell papers or black boots, or carry on 
any kind of business while on the train or boat, the 
carrier is not obliged to accept him as a passenger. 

4. Duty not to Discriminate. — The common carrier of 
passengers cannot make any improper discriminations 
in the facilities which he offers to those who apply. 
He may, however, make reasonable regulations. He 
may set apart a car or compartment exclusively for the 
use of women, and enforce such a regulation. He may 
offer better facilities to people who pay more money and 
who are going longer distances, or who have different 
kinds of tickets, but he may not capriciously discrimi- 
nate between people on account of their race or color. 
In some states it is contrary to law to make negroes 
go into a car by themselves ; in other states this is con- 
sidered a reasonable regulation, particularly if the car 
set apart for negroes is as comfortable as the one set 
apart for white people. Such a regulation is consid- 
ered reasonable in most of the Southern states, where 
negroes are much more numerous than in the North. 



CHAPTER II 

LIABILITY OF THE CARRIER OF PASSENGERS 

1. Carrier of Passengers not an Insurer. — The common 
carrier of passengers is not an insurer of the safety of 
the persons whom he transports from place to place. 
We have seen that if a common carrier accepts goods, 
and makes a contract to carry them safely from one 
point to another, he is absolutely responsible for the 
safe delivery of the goods. But if the carrier accepts 
you as a passenger, and agrees to transport you safely 
from Chicago to New York, he does not thereby abso- 
lutely guarantee to set you down safely at New York. 
What he does agree is, that he will use all possible care 
to transport you safely, and that if he fails to use all 
possible care, then he will be responsible. In other 
words, if a common carrier has injured you while you 
are traveling as a passenger, it must appear that he has 
failed, in some small particular, at least, to exercise due 
care in preserving you from danger, or else you cannot 
hold him responsible. Suppose a freshet has washed out 
a bridge, and the train which you are on falls into a 
gully, and you are severely injured. If it appears that 
the train men could not have guarded against the acci- 
dent by any possible precaution, then jou cannot recover 
for your injuries. If it appears, however, that they 
should have ascertained the injury to the track, and 
ought to have guarded against the accident to the 
train, and could have done so, you can recover. 

255 



256 CONTRACTS OF COMMON CARRIERS 

Not only may you not recover if it has been proven 
that the company was not negligent, but you may not 
recover if you yourself have been negligent. If you 
attempt to board a moving train, no matter how careless 
the train men may have been, you cannot recover, for 
you have been injured while doing something which 
you should not have done : by your own negligence you 
have contributed to the accident. 

If the carrier has failed to deliver you at your des- 
tination at the time agreed upon, he may be responsible 
for any reasonable loss which you may have sustained, 
provided the delay was due to some negligence on his 
part. The officers are not absolutely bound, however, 
to conform in every particular to the time scheduled, 
for this is recognized to be an impossibility. 

As we shall see more fully when we discuss the 
subject of agency, the common carrier is also responsible 
for injuries received by the passengers through the 
wrongful acts of its servants. Suppose the conductor 
of a train wrongfully puts you off, and you are con- 
sequently injured or suffer some loss, you may recover 
against the company, provided the act of the conductor 
was done while he was acting within the scope of his 
authority. 

2. Contracts limiting Liability. — The common carrier 
of passengers is not allowed to make a contract by which 
he provides that he shall not be responsible for his own 
negligence. Such contracts are absolutely void. In 
some states it is provided that a contract may be made 
by which a carrier shall not be responsible for his negli- 
gence resulting in injury to gratuitous passengers, but 
these cases are rare. It is contrary to public policy to 
allow a carrier to provide against his own negligence, 



LIABILITY OF THE CAllRIER OF PASSENGERS 257 

because in such a case he would use less diligence in 
providing careful and competent servants. 

3. Liability for Baggage. — A common carrier is not 
only bound to receive as passengers all proper persons 
who apply, but he is also bound to accept and carry a 
reasonable amount of baggage. The liability of the 
carrier of passengers for the safe carriage of the baggage, 
is the same as the liability of a common carrier of goods 
for the safe transportation of merchandise. The only 
point of difficulty, and the only new problem presented 
is the question, What is baggage? As a part of his 
contract of carriage, for which the payment of his 
fare is a consideration, every passenger has the right to 
take with him a reasonable amount of certain articles, 
which properly come within the term "baggage." By 
baggage is meant such articles of wearing apparel or 
of personal convenience as are usually carried by pas- 
sengers for use during the journey, or while sojourning 
at their destination. 

The chief point of distinction between baggage and 
other property that might be offered for carriage, is that 
baggage must consist of such articles only as are for the 
personal use of the traveler. Other articles need not 
be accepted by the carrier, and if accepted when packed 
in such a way that his servants cannot tell whether 
they are baggage or not, he is not liable as an in- 
surer. Thus clothing, jewelry intended to be worn, 
opera glasses, guns intended to be used for sporting 
purposes, etc., are baggage. But drummers' samples, 
money not intended for personal use on the journey, 
cloth for a third person, quantities of jewelry not in- 
tended to be worn, etc., are not baggage. If the pas- 
senger retains his baggage in his own custody instead 



258 CONTRACTS OF COMMON CARRIERS 

of delivering it up to the carrier, the latter is not held 
to the responsibility of an insurer. 

If articles that are not baggage are carried on the per- 
son of the passenger, the carrier is under no liability at 
all. Thus, a passenger who carried twenty thousand 
dollars' worth of bonds on his person, and who lost all 
of them in a wreck, was not allowed to recover any- 
thing at all for the loss of the bonds. He had not 
intrusted them to the company and they were, more- 
over, not baggage. In general, also, the passenger must 
be the owner of the baggage he is carrying, and must, 
as a rule, accompany it. If, however, his trunk is sent 
ahead by special arrangement, it is deemed to be baggage, 
in spite of the fact that the owner does not accompany 
it. Finally, if the carrier accepts for carriage goods 
which are known not to be baggage, he will be liable 
as an insurer, for by so doing he has made a contract 
for the transportation of those articles, which contract 
contemplates the responsibility of a common carrier. 

4. When the Liability Terminates. — The liability of 
the common carrier is, obviously, at an end as soon as the 
passenger has reached his destination, and has alighted 
from the train or boat in which he has been carried. 
If the passenger leaves the vehicle before he reaches the 
end of his journey, the responsibility of the carrier ter- 
minates at that time. If he does not leave of his own 
motion, but is put off the train or off the boat for 
improper conduct, or refusal to pay his fare, or for 
some other legitimate reason, the liability of the carrier 
then terminates. As in the case of a carrier of goods, 
the liability of one carrier terminates when he delivers 
the passenger to a connecting carrier for transportation 
on the next stage of his journey. 



CHAPTER III 

RIGHTS OF THE COMMON CARRIER OF PASSENGERS 

1. Right of Compensation. — The carrier of passengers 
is of course not required to carry them without com- 
pensation. Inasmuch as he is bound to accept all 
proper persons who may apply, as long as he has room 
to carry them, he is not compelled to accept a passenger 
at all for tranportation unless he has been paid fare in 
advance. This regulation is clearly necessary in order 
to protect the carrier against the public, whose servant 
he is. 

2. Right to make Regulations. — The common carrier 
of passengers has a right to make all needful and proper 
regulations for the government of those who are under 
his care. He also has the right to enforce these regu- 
lations and, if necessary, to call in the officers of the 
law to assist him. Among such regulations is the one 
familiar to every one, requiring a person to pay a higher 
rate of fare in case he fails to purchase a ticket before 
entering the train. The regulation concerning the cars 
in which individuals shall go, and relating to the man- 
agement of depots and stations, are regulations which 
the common carrier has a right to make and enforce. 



259 



PAET VI 

AQENCY 

CHAPTER I 

CLASSES OF AGENTS 

1. Necessity for Ag^ents; Definition. — Hitherto we have 
been investigating the nature and obligations of the 
contractual relation. We have also discussed the man- 
ner in which this relation may be created; but in so 
doing we have considered only cases where the contract- 
ing parties were themselves present, and either did the 
acts or said the words, by virtue of which they became 
bound. It is obvious that a very large part of the busi- 
ness of this world is carried on, not by the parties who 
themselves are most interested, but by others who have 
been appointed to act for them. This must necessarily 
be so by reason of the many duties devolving upon a 
single individual who is at the head of a large busi- 
ness, and of the fact that it is often necessary for dif- 
ferent contracts to be made, and for different interests 
to be looked after, in widely separated parts of the 
earth at the same time. These things made the ap- 
pointment and use of the agent a necessity. 

An agent is he who is appointed to do something in 
the place of another. One thus appointed may, on 

260 



CLASSES OF AGENTS 261 

behalf of his employer, called his principal, do any act 
which he has been authorized to do, binding the prin- 
cipal as fully as if the latter himself had done the act. 
It is a general rule that an agent binds his principal 
for acts which he does, or agreements which he makes, 
only while acting within the scope of the authority 
which has been delegated to him by his principal. It 
then becomes important to note the classes of agents, 
the extent of the authority of each class, and the manner 
in which this authority may be conferred. 

2. General and Special Agents. — Agents are usually 
divided into two classes, general and special. A gen- 
eral agent is one who has received from his principal a 
general authority to do certain acts. His authority is 
not limited to making one particular contract or doing 
one particular thing — he has more or less discretion. 
The general manager of a business is a general agent. 
He has authority to do any act necessary for carrying 
on the business, and his actions will bind his principal 
just as completely as if the latter had given him a spe- 
cific authority to do each particular thing. Agents of 
this class have almost as much power as the principal 
himself, as long as they are acting within the general 
field of the business for which they are employed. 

A special agent is one who has received no general 
authority to do any acts, but who has been given special 
authority to do some specific thing. If one has not 
been appointed general manager of a business, but has 
been authorized to make a particular contract, and at- 
tempts to make any contract except that one, he goes 
beyond his authority and does not bind his principal. 
If A employs B as an agent to purchase a particular 
horse for him, B has no power to purchase any horse 



262 AGENCY 

except the one designated. If he sees another which 
lie thinks would suit his principal as well, and pur- 
chases him, the bargain will not bind the principal, for 
the agent has gone beyond his authority. But if he 
has been appointed a general agent to buy horses, and 
has been directed to purchase a particular horse at a 
particular time, then if he chooses to buy another 
which he thinks would suit his principal better, the 
contract will bind, because he has a general authority 
to purchase horses. The instruction to purchase a 
particular horse does not restrict the authority of the 
agent, but only expresses a preference on the part of 
the principal. A general agent may do many acts 
which he is not expressly commanded to do by his 
principal, and these acts will bind ; but a special agent 
must be very careful not to depart from the strict 
letter of his instructions. Some authors object to this 
classification, on the ground that it is illogical; they 
say that the difference between a general and special 
agent is not a difference in their essential nature, but 
merely of degree. This may be true, but nevertheless 
it is simpler to think of agents as being divided into 
these two classes, because there is a real distinction as 
to the responsibility which each class is under. 



CHAPTER II 

CREATION OF RELATION OF PRINCIPAL AND AGENT 

1. Who may be Principal or Agent — It is a general 
maxim of the law that he who may do an act himself, 
may do it through the medium of an agent. It fol- 
lows that he who may not do an act in his own person, 
may not do it through the agency of another. If a 
man is unable to make a contract he cannot, of course, 
become a principal and designate an agent to make it. 
Any one who is himself under a disability which would 
prevent him from contracting, cannot appoint an agent 
to act in his stead. 

Infants, lunatics, and married women may contract 
by agents to the same extent that they may contract in 
their own persons, and no further. The limitations of 
the contracting power of these persons we have already 
discussed, and need not dwell upon them again at this 
time. 

Practically, any one who has any discretion at all 
may be an agent, the mere exercise of authority not 
requiring the full capabilities of one contracting for 
himself. Infants, married women, etc., may be agents 
and bind their principals to contracts which they can- 
not make themselves. The principal is the judge of 
the discretion of his agent, and if he falsely relies upon 

263 



264 AGENCY 

it, he has no one to blame but himself. It is prob- 
able, however, that an idiot or one non compos mentis 
would be incapable of acting as agent because of his 
total lack of discretion. 

2. Delegation of Authority. — Having seen who may 
be a principal and who may be an agent, the next ques- 
tion is. How may the relation of principal and agent be 
created? When A expressly authorizes B to make a 
contract on his behalf, there can be no question that the 
relation of principal and agent is created. Whenever 
one man expressly delegates to another the authority to 
do some act for him, the relation of principal and agent 
is thereby established between them. If the authority 
is to make an ordinary simple contract, the appointment 
may be made either orally or in writing, at the option 
of the principal. If, however, one wishes to delegate 
to another authority to make a sealed contract, he must 
give to the agent a sealed instrument called a "power 
of attorney," by which he gives to him the requisite 
authority. 

In most cases, however, where one man acts as the 
agent of another, there has been no express delegation 
of authority. The principal merely indicates what he 
wishes the agent to do, and the agency is created by the 
doing of those particular acts. Or it may be that by the 
conduct of the parties the relation has gradually been 
established. Perhaps he has, little by little, granted 
authority to the one who is acting for him. Suppose a 
lawyer employs an office-boy who at first does nothing 
but take care of the office and run errands ; he becomes 
his agent for those purposes. Later on, as he grows 
older and becomes more capable, he is permitted to 
transact more or less business on the part of his princi- 



RELATION OF PRINCIPAL AND AGENT 265 

pal, signing receipts, or even making contracts, and 
doing other acts of a like nature. Thus, without any 
express delegation of authority, the office-boy has be- 
come, perhaps, a general agent to do a certain class 
of acts. Perhaps the most common example of implied 
agency (apart from such situations as this where clerks, 
office-boys, etc., are impliedly made agents) are cases 
where men have allowed their wives habitually to con- 
tract for them, or have continually sent their children 
or servants to do acts which involve the power of 
agents. In this way the wife or servant or child be- 
comes the agent to do the acts which they have been 
accustomed to do, and can bind the husband or master 
or father as completely as if there had been an express 
delegation of authority. 

3. Ag^ents by Necessity. — Sometimes the relation of 
principal and agent may be created without either an 
express or implied delegation of authority. This may 
happen only in unusual situations or under peculiar 
conditions. One partner is always the agent for the 
other partners, as we shall learn when we discuss 
the subject of Business Associations. Consequently, 
the mere creation of partnership relations constitutes 
each partner the agent of all the others. 

Again, if a husband has gone away from home with- 
out providing adequate means for his wife's support, 
she, of necessity, becomes his agent so as to be able to 
bind his estate for the purpose of purchasing the neces- 
saries of life to supply herself and family. If a sea- 
captain, navigating a vessel, finds it necessary to repair 
his ship when he is in a foreign port, he may make a 
contract which will bind the owner of the vessel. If 
this were not the case he would be unable to repair the 



266 AGENCY 

ship, and the result might be its total loss. In all these 
cases the agent derives his authority from necessity. 

4. Ratification of Acts done by Unauthorized Agents. — 
Sometimes a man who is really not an agent of another, 
will do an act upon his behalf and which purports to 
bind him. In such a case the principal is not bound 
in any way. He cannot be held responsible for the 
act of an individual to whom he has given no authority 
to act for him. If, however, after the act has been done, 
the principal approves it and ratifies it, then it will 
bind him. The situation is exactly the same as if 
the principal had delegated the authority to the agent 
before the act was done. 



CHAPTER III 

LIABILITY OF PRINCIPAL FOR ACTS OF AGENT 

1. Liability for Contracts. — When an agent makes a 
contract on behalf of his principal, he binds not him- 
self, for he is only the instrument, but his principal, 
provided he is acting within the scope of his authority, 
or if the principal ratifies his act. The most important 
thing to ascertain in such cases is whether the agent 
has acted within the scope of his authority. In order 
to determine that, it is necessary to know the exact ex- 
tent of the authority delegated. Here the importance 
of distinguishing between the general and special agent 
is obvious. One who has been delegated to do a single 
act can bind his principal for nothing else. But if an 
agent has been delegated to do a certain class of acts, 
and has been accustomed to do those acts, and the 
public has come to understand that he has a general 
authority for that purpose, it would be unjust not to 
permit him to bind his principal, as long as he is acting 
within the general field in which he has power to act, 
because otherwise the public would be defrauded. 

If I constitute A an agent to purchase for me a certain 
house, and A buys another which he thinks as good a 
bargain, the act does not bind me. My agent being 
special, all persons dealing with him are bound to 
ascertain the extent of his authority. But, on the 

267 



268 AGENCY 

other hand, suppose I am an extensive dealer in real 
estate and A has for many years bought for me. I tell 
him to purchase a particular house, and he oversteps his 
instructions to the extent of purchasing another one. 
There you see we are in a slightly different position. 
The public knows that A buys houses for me, there- 
fore the seller is protected, and the bargain binds me. 
It may be laid down as a general proposition that a 
special agent cannot bind his principal, even though he 
is acting for him and in the course of his business, 
unless he is strictly within the letter of his instruc- 
tions. But a general agent, if he is acting in the 
general scope of the employment in which he is ac- 
customed to act for his master, binds him, even though 
he may not conform exactly to his orders. A special 
agent has no authority which the principal has not ex- 
pressly conferred ; a general agent has all the authority 
which the acts of the principal seem to confer upon him. 
2. An Agent must always Act for his Principal. — In 
all cases, whether the agent be general or special, the act 
which he does must be for the benefit of the principal, or 
else it will not bind the latter. By this it is meant that 
if the agent does an act entirely on his own behalf and 
not on account of his principal, he cannot be acting 
within the scope of his authority. This is a very 
delicate question and sometimes leads to difficulties, 
because it often results in the deception of the public. 
An attorney who had a general authority to discount 
all bills of exchange for his principal, discounted two 
bills of exchange to obtain money for his own use ; the 
court decided that inasmuch as he had done the act for 
his own benefit, and not for the benefit of his principal, 
it did not bind the latter. The indorsement, therefore, 



LIABILITY OF PRINCIPAL FOR ACTS OF AGENT 269 

which the agent placed upon the bill was held not to 
subject the principal to any liability. This is a very 
doubtful decision. From the standpoint of the party 
who discounted the bill, it made no difference what the 
secret intention of the agent might have been. The 
third party would seem to have had a right to rely upon 
the apparent authority. In most cases the third party is 
safe in relying upon this apparent authority, for if the 
principal has given apparent authority to the agent, 
he will not be allowed to deny that he gave him real 
authority. 

3. The Public may Rely upon the Apparent Authority of 
an Agent. — It is a general rule of law that a principal 
is bound to the extent of the apparent authority which 
he confers upon his agent. Even though he may not 
actually have intended to confer as great an authority 
as he appears to have conferred, yet he is bound; other- 
wise the public would be deceived. If a principal dele- 
gates to another an apparent general agency, but gives 
him secret instructions limiting his power, these secret 
instructions will not vary the rights of innocent parties 
who have dealt with the agent. 

A sent B to the South to buy cotton at a time when 
the armies of the North and South were engaged in 
active hostilities. A secretly instructed B to include 
in all contracts a stipulation that no cotton was to be 
paid for until it was landed at St. Louis. B purchased 
cotton in the usual way and it was shipped on the Mis- 
sissippi River. It was destroyed in transit. A con- 
tended that there was no contract, as B had exceeded 
his instructions. It was decided that the contract 
bound him. He had given his agent the apparent 
authority to purchase cotton in the usual way, and he 



270 AGENCY 

could not now be allowed to say that he had not given 
him real authority. 

4. Liability for Torts ; Reason for Liability. — Not only 
does the agent subject his principal to liability for con- 
tracts which he makes while acting for him and within 
his instructions, but he also subjects him to liability 
for all wrongs or torts which he commits while he is 
acting in the general course of his principal's employ- 
ment. Suppose you are run over by a street car, by 
reason of the negligence of a conductor. You may sue 
the street-car company and recover damages, not because 
the company did the act, nor because it carelessly 
selected its servant, for it very probably did neither; 
but because from time immemorial the act of the agent 
has been said to be the act of the principal, and therefore 
the latter is responsible in damages for it. 

There is no logical reason why a principal should be 
liable for his agent's wrongful or negligent acts. The 
origin of the rule is historical, and not logical. In 
ancient times, a servant or slave was considered merely 
as a thing or chattel. If the slave killed a man or 
injured him greatly, the slave would be given up to 
the injured man, or to his family, for vengeance. 
After a while, a master who had valuable slaves would 
seek to compromise a case where such a tragedy had 
happened. He would offer to pay the amount of the 
damage if he might be allowed to retain the offending 
slave. Probably from this custom was deduced the rule 
that whenever the slave, or in modern terms, the agent, 
does an act, the principal, who has replaced the master, 
must pay for it. 

5. How Far the Principal is Liable for Torts. — The 
problem which most concerns us to-day is. For what 



LIABILITY OF PRINCIPAL FOR ACTS OF AGENT 271 

torts is the principal responsible ? The answer, in gen- 
eral terms, is. For all torts committed while the agent 
is about his master's business — while he is acting 
within the scope of his principal's employment. 

A, who was the proprietor of a livery stable, ordered 
a driver, B, to drive to the stable and put up his team. 
B drove in exactly the opposite direction to deliver a 
parcel, intending afterward to go on around to the 
stable as directed. While on the way he ran over a 
man and badly injured him. The court said that the 
servant was acting for the master inasmuch as ulti- 
mately he was going to the stable : therefore the princi- 
pal was held liable. If, however, to use the expression 
employed in a case very similar to the above, the ser- 
vant is going off on "a frolic of his own," he will not 
subject his master to liability for his torts. The tort 
must be one that was committed at a time when the 
agent was acting for his principal and within the gen- 
eral scope of his authority. 

6. Principal not Liable for Malicious Wrongs. — It is 
sometimes very hard to tell whether the agent is acting 
for the master or on his own account. A brakeman on 
a freight train ordered a boy, who was stealing a ride, 
to get off; the boy refused; the brakeman undertook to 
put him off, and, on account of some resistance on the 
part of the boy, became very angry and roughly threw 
him off while the train was moving. The boy's leg 
was cut off, and he sued the company to recover dam- 
ages for the injury. It was contended that the com- 
pany should not be responsible, that the act of the 
brakeman was a willful act, as he was not instructed 
to throw boys off moving trains; but the court de- 
cided that the company was responsible, because the 



272 AGENCY 

brakeman had been ordered to put all trespassers off of 
the cars. While his act was unnecessarily rough, it 
was within the general scope of his orders. 

If, however, an agent does an act out of pure ma- 
liciousness and not to further the interests of his em- 
ployer, then he cannot subject him to liability. A 
brakeman requested a passenger who was smoking in 
the wrong car to leave it and go into the smoking-car. 
The passenger refused, and, after angry words passed 
between them, the brakeman struck the man over the 
head with his lantern and severely injured him. The 
court decided that the company was not responsible, 
for under no view of the case could it have been the 
duty of the brakeman to hit passengers over the head 
with his lantern. The act which he did was not done 
in the interest of the company. 

7. Where the Agent is Guilty of Deceit. — There is a 
certain class of torts in which it is necessary that the 
person charged shall have been guilty of moral wrong- 
doing. You will remember from our discussion of 
fraud that one is not liable in deceit unless he has 
either willfully or recklessly lied. There has been some 
dispute as to whether a principal can be held liable in 
deceit for a fraudulent act which has been committed by 
his agent. 

Some writers take the view that the principal is 
held responsible for the negligent acts of his agent, 
because the principal constructively may be charged 
with negligence, inasmuch as he has hired the servant 
who has been careless. These writers say that where 
the wrong of deceit is involved you cannot charge the 
principal, for, in order for the wrong to be complete 
there must have been some moral wrongdoing on the 



LIABILITY OF PRINCIPAL FOR ACTS OF AGENT 2T3 

part of the individual to be charged, and, inasmuch 
as the fraudulent act is committed entirely by the 
agent, it is impossible to impute his wrongdoing to the 
principal. You cannot say that the principal has been 
guilty of a willful wrong, consequently he is not 
charged unless he has actually had some part in the 
deceit. 

This view is an absurdity. The principal is 
chargeable not because he is guilty of a wrong, for he 
is not, but because, by virtue of his relation to the 
agent, he has taken upon himself the liability for all 
wrongs done by the agent while acting within the 
scope of his authority. It is incorrect to say that 
the principal is constructively charged with the wrong- 
doing of his agent ; as a matter of fact, in almost every 
case the principal cannot in any way be said to be 
morally responsible for the act of his servant. The 
real reason for his liability is, that when he engages 
in business and hires servants to work for him, he 
assumes the common law liability for the acts of those 
whom he emploj^s. As we have before indicated, 
this liability is based upon no logical reason, — it is 
merely fastened upon all persons who choose to conduct 
business under such circumstances. The principal, 
therefore, is responsible for all torts, irrespective of 
their nature, as long as they have been done for his 
benefit and within the scope of the authority of the 
agent. The later decisions have adopted this view. 

8. Where there are Sub-contractors. — A question often 
arises as to who employs the servant who has done the 
act. Suppose you own a lot of ground and desire to 
build a house. You employ a contractor to erect the 
building. He sublets the contract to a builder, who 



274 AGENCY 

employs a painter, whose assistant carelessly drops a 
beam on the head of a stranger. Whose servant was 
the wrongdoer? The painter's, the builder's, the con- 
tractor's, or yours ? A few years ago you would have 
been held responsible. At the present time you would 
not be. The man is the servant of the independent 
contractor who employed him. If the painter was 
such a contractor, then no liability could exist beyond 
him. 

9. Liability for Crimes. — It may seem very strange to 
say that one man could ever be responsible for the 
crimes of another, nevertheless there are crimes which 
may be committed by the agent and for which the prin- 
cipal is held responsible. Such crimes as murder and 
robbery could never be committed by the agent, while 
acting within the scope of the authority delegated to 
him by his master, unless the master at the same time 
was really the murderer or the robber ; consequently the 
consideration of such a situation does not enter here. 
In all such cases the parties are equally guilty. But 
there are some crimes which may be committed by the 
agent while he is acting within the scope of the 
authority delegated to him by the principal, although 
the principal did not directly contemplate them. 

It is a criminal offence in most states to publish libel- 
ous matter. The owner of a newspaper may be crimi- 
nally prosecuted for libelous matter which has been 
published by his agent, without his orders and without 
his knowledge. In most states there is a special provi- 
sion that in case libelous matter is published about a 
man who is running for public office, or any individual 
whose reputation is properly before the public for dis- 
cussion, the one responsible for the publication cannot 



LIABILITY OF PRINCIPAL FOR ACTS OF AGENT 275 

be held criminally liable unless his act was done 
maliciously or carelessly. 

There are a few other situations where a principal 
may be responsible for the crime of an agent. In many 
states it is a misdemeanor to sell liquor to minors. 
An owner of a saloon may be responsible for the acts 
of the barkeeper in selling to minors, although he did 
not give directions to sell to them, and even if he has 
given specific orders against it. 



CHAPTER IV 

LIABILITY or THE AGENT FOR HIS ACTS 

1. For Torts. — An agent is always responsible for the 
torts which he commits. We have learned that the 
principal also is responsible, but this does not relieve 
the agent from responsibility. As a matter of fact, the 
one who is sued in nearly all cases is the principal, for 
the practical reason that the agent is not usually finan- 
cially responsible. Nevertheless, sometimes an agent 
is almost as responsible as the principal. In such cases 
it is simpler to charge the agent directly, because then 
it is not necessary to enter into the question as to 
whether he was acting within the scope of his authority. 
If the agent is acting beyond the scope of his authority 
the principal is not liable ; and in such cases, therefore, 
the agent is the only one who can be charged. 

2. For Unauthorized Contracts. — We have explained 
that an agent binds his principal only for those con- 
tracts which he makes while he is acting within the 
scope of his authority. But if an agent has made a 
contract which is beyond his authority, the principal is 
not liable, because he has never consented, either 
directly or indirectly, to be bound. The only person 
who can be held responsible in such a case is the agent. 
Strictly speaking, he cannot be held responsible as a 
party to the contract, because he did not purport to make 

276 - 



LIABILITY OF THE AGENT FOR HIS ACTS 277 

the contract on his own behalf; but he is responsible for 
damages to the third party, for any loss which may have 
been incurred by reason of his false representation that 
he had authority to make the contract when he had not. 
He is responsible, whether he made the false statement 
innocently or not. 

3. Where the Principal is not Named; Rights of the Third 
Party. — It sometimes happens that an agent makes a 
contract with a third party and does not disclose the 
name of the principal, or perhaps even conceals the 
fact that he has a principal. If he discloses the fact 
that he is an agent, but does not name his principal, 
the question as to whether or not you can hold the 
agent on the contract depends upon the terms of the 
agreement. If it clearly indicates that the agent con- 
tracts as agent, acting for a principal as yet unknown 
to the third party, then the latter is giving credit to 
the unknown principal, and if the latter repudiates, the 
agent cannot be held. 

If, however, the contract does not expressly state 
that the agent is an agent, but leaves it doubtful 
whether he is contracting on his own behalf or for some 
unknown principal, then the third party has the right 
of election; he may charge which one he prefers, either 
the agent or the principal, but when he has elected to 
hold one he cannot thereafter hold the other. 

It has been suggested that to allow an undisclosed 
principal to be brought into a written contract, made 
between an agent and a third party, would be to con- 
flict with the well-known rule of law that no oral evi- 
dence can be brought in to vary a written contract. 
This objection, however, is not valid. If the agent 
were allowed to free himself from liability by bringing 



278 AGENCY 

in the principal, there would be ground for this objec- 
tion, but the agent is not permitted to do this. The 
third party may bring in evidence to show who the 
principal is, in order to hold him responsible, but the 
agent cannot in any way lessen his own liability by so 
doing. A party may be added to a written instrument 
by oral evidence, but one may not be taken away. 

4. Rights of an Undisclosed Principal against the Third 
Party. — In the case which we have been discussing, 
suppose the third party is the one who seeks to break 
the contract: Who may hold him responsible, the 
agent or the hitherto undisclosed principal? The 
rule is, that either may do so. When he has disclosed 
himself, the principal may come in and sue the third 
party, if it does not appear by the terms of the contract 
that the agent alone is chargeable. When he is sued 
by the principal, the third party may urge any defence 
against him that he could have set up against the agent. 

Suppose A makes a contract with B for the purchase of 
certain stock; A pays B half of the amount due under 
the contract ; afterwards C is shown to be the real prin- 
cipal for whom B was selling the stock. In the mean- 
time, B has absconded without paying any of the money 
over to C which he received from A. C sues A under 
the contract to recover the entire amount. C may 
recover from A only the amount remaining unpaid. A 
would have had a defence of part payment as against 
B, and he has the same defence as against C. 



CHAPTER V 

MUTUAL DUTIES OF PRINCIPAL AND AGENT 

1. Compensation and Reimbursement. — Every principal 
owes to his agent the duty to pay him a reasonable com- 
pensation for his services, and the agent may retain 
funds belonging to his principal until he is paid. The 
agent is also entitled to be reimbursed for any expense 
or injury he may have suffered on behalf of his princi- 
pal, provided it was legitimately incurred while he was 
acting within the scope of his authority. A, while in 
an island of the West Indies transacting business for 
B, fell under the displeasure of one Christophe, who 
was at that time president of the island, and was con- 
demned to pay a fine of three thousand dollars or else 
to fight a duel to the death with a person designated by 
the president. To save his life the agent paid the 
money, and subsequently sued his principal to recover 
the amount. It was decided that he could recover. 
The expense was incurred by the agent while acting for 
his principal, and the latter was bound to reimburse 
him. It may be stated as a general rule, that whenever 
an agent is subjected to loss by reason of some duty 
which he has performed for his principal, the latter is 
bound to make the loss good. 

2. Responsibility for Personal Injuries; the Fellow-Ser- 
vant Rule. — Although the master is responsible for 

279 



280 AGENCY 

injuries caused by third parties, if received by bis ser- 
vants while acting within the scope of their employ- 
ment, he is not responsible in damages to a servant or 
an agent for an injury incurred through the negligence 
of a co-worker, technically known as a fellow-servant. 
The reason for this is not very satisfactory. The rule 
is justified by saying that when a servant hires himself 
to work for a master, he assumes to take upon himself 
all the risk of injury resulting from the nature of the 
employment. It is said that, inasmuch as he has 
assumed this risk, he cannot charge his master for an 
injury which he suffers as a result of it, and that all 
injuries which he receives on account of the negligence 
of fellow-servants, are injuries the risk of which he takes 
upon himself when he enters into the employment of 
his master. This assumption is untrue in fact. An 
employ^ does not actually assume such risks, and 
there seems to be little reason for implying such an 
assumption. But however unsatisfactory the reason of 
the rule may be, it exists in practically all the states. 

In some states the word "fellow-servant " is construed 
to mean only those who are in the same grade of employ- 
ment. Two engineers, two conductors, two motormen, 
or two track-walkers would be fellow-servants, but an 
engineer and a conductor, or a track-walker and a brake- 
man, or a motorman and a workman in a machine shop, 
would not be, even though employed by the same mas- 
ter. In other states, particularly in the state of Penn- 
sylvania, practically all who work for the same master 
are classed as fellow-servants, so that it is really impos- 
sible for a workman who has been injured through 
the negligence of another workman who receives his 
wages from the same source, ever to recover anything 



MUTUAL DUTIES OF PRINCIPAL AND AGENT 281 

on account of his injury. Of late years a movement has 
begun to develop, the tendency of which is to limit, and 
perhaps finally to abolish, the fellow-servant rule: it is 
to be hoped that it will succeed. The man who is thus 
injured deserves to receive compensation for his injuries 
as much as any one, perhaps more so. It seems unjust 
to deny a recovery in his case and to permit it in others. 

3. Absolute Duties. — Although he is not responsible 
for injuries caused by his own servants to each other, 
there are certain obligations which the master is under 
toward all of them. He is bound to supply a safe place 
to work in, safe machinery to work with, and compe- 
tent fellow-servants. By this latter it is meant that 
notoriously careless or incompetent servants must not 
be employed. To do so is negligence on the part of the 
master. 

The principal must also make suitable rules and 
regulations to govern the actions of his employes, 
so as to protect them from injury as much as may be. 
A, a contractor, employed B, an inexperienced work- 
man, to erect a scaffold upon which C was to work. 
The scaffold was improperly constructed, and, by reason 
of that fact, C fell and was injured. C was allowed to 
recover, although B was a fellow-servant. A, by hiring 
an inexperienced workman to erect the scaffold, had 
failed in his absolute duties. He himself was guilty 
of negligence. 

In such cases, if it appears that the master has failed 
in some of these duties, he is responsible, even though 
he is not shown to be actually negligent ; his failure to 
provide safeguards makes him responsible without any 
imputation of carelessness. Moreover, even though the 
servant may have known of the defective machinery with 



282 AGENCY 

which he was working, this will not prevent a recovery, 
although it may be evidence of contributory negligence 
which the jury may take into consideration. Where an 
elevator-boy was injured by the fall of an elevator which 
was caused by a defective rope, the evidence showed 
that he knew the rope was in a dangerous condition, 
but, nevertheless, he was permitted to recover. 

4. Obedience, Diligence, and Skill. — On the other hand, 
when an agent enters into the employ of his principal, 
and undertakes on his behalf the duties which are 
assigned to him, he must exercise diligence and skill, 
and he must be obedient to the orders which he receives. 
If he fails to obey his master or if he fails to use 
his own skill, or if he is less careful than an ordi- 
narily prudent man under the circumstances would be, 
he has failed in his duty toward his master, and may be 
held responsible by him. Thus, to revert to a previous 
illustration, if a principal secretly instructs his agent 
to buy cotton, only on condition that no payment is to 
be made unless the goods actually arrive at their desti- 
nation, — while the acts of the agent outside of his 
instructions may bind the principal, yet they are in 
disobedience to his orders, and the agent may be 
charged with the resulting damage. 

5. Loyalty. — The agent is also bound to be loyal to 
his master; by this we mean that he may not secretly 
give a part of his time to some other pursuit, when 
ostensibly he is working only for his principal; and 
more particularly do we mean that he must not enter 
into the service of some one whose interests are antago- 
nistic to the interests of his principal. 

Suppose A is the owner of a house which he desires 
to rent. He employs B to secure him a tenant. B sub- 



MUTUAL DUTIES OF PRINCIPAL AND AGENT 283 

sequently meets X, who is searching for a house suit- 
able for him to rent and occupy. X employs B to find a 
house for him. Without disclosing his double agency 
to either party, B conducts the negotiations between the 
two. He is bound to injure one or the other of his prin- 
cipals. Inasmuch as their interests are antagonistic to 
each other, he cannot possibly serve both. In such a 
case, had he frankly disclosed the situation to both 
parties and allowed them to come together, there would 
be no objection to the transaction. Otherwise, he has 
been guilty of disloyalty to one of them and is liable in 
damages. It is also generally understood that when a 
servant is employed, he must perform his duties himself 
and not delegate them to some one else. In the absence 
of an agreement that he shall be allowed to do this, such 
a delegation would be disloyalty. 



CHAPTER VI 

HOW THE RELATION OF PRINCIPAL AND AGENT MAY 
BE TERMINATED 

1. By Act of the Parties. — Having discussed the vari- 
ous rights and duties of principal and agent, we now 
ask how this relation may be brought to an end. The 
simplest manner, perhaps, is by revocation of authority 
on the part of the principal, or by renunciation on the 
part of the agent. The principal is always at liberty 
to dissolve the relation by merel}^ notifying his agent 
that he is no longer to act for him. This revocation 
of authority is of no binding effect until it comes to 
the knowledge of the agent. Contracts which the 
agent has made in the meantime, therefore, will still 
bind the principal. 

There is, however, one kind of agency which may 
be mentioned, where the principal is not at liberty to 
revoke the authority. If A delegates B as his agent 
to do some act which will result in profit to B, and 
in consideration of this delegation of authority B pays 
value, A is not allowed to revoke. In such cases the 
authority is said to be irrevocable. Suppose A lends 
one thousand dollars to B, and, as collateral security, B 
gives to A one hundred shares of stock, with a power 
of attorney to sell the stock in case the debt is not 
paid at maturity. In such a case, B could not revoke 
the authority given by the power of attorney. If he 
did not pay the debt at maturity, A could sell the stock 

284 



TERMINATION OF RELATION 285 

in spite of any attempted revocation on the part of B. 
A renunciation of his agenc}^ by the agent will, of 
course, sever the relation as completely as a revocation 
on the part of the principal. 

2. By Death. — As it is quite impossible for a dead 
man to make a contract, either personally or through the 
means of an agent, consequently, if the principal dies 
the agency terminates at once. It is not necessary for 
the fact of the principal's death to come to the knowl- 
edge of the agent; the authority is revoked at the 
instant when the principal ceases to exist. Conse- 
quently, if an agent makes a contract with a third 
party before he is aware of his principal's death, the 
contract binds no one. 

3. By War. — If an agent and his principal are upon 
different sides in case of a war between two countries, 
the breaking out of the war will terminate the relation. 
A was an insurance agent who lived in the South — 
his company being located in New York. The break- 
ing out of the War of the Rebellion interrupted the 
agency of A. Although he had received no formal 
revocation of his authority, the contracts which he 
made in the meantime did not bind his principal. 

4. Insanity of the Principal. — If a principal has 
become insane, he has, as we have already learned, 
become incapable of making a contract, and it follows 
that his agent can no longer make contracts on his 
behalf, for a man cannot do by an agent what he cannot 
do himself. It has been decided, however, that the 
authority of an agent to make contracts is not termi- 
nated by the insanity of the principal until the knowl- 
edge of such insanity has been conveyed to the agent. 



PAET VII 

BUSmUSS ASSOCIATIONS 



SECTION I 
PAETNEESHIP 



CHAPTER I 

ESSENTIAL CHAEACTERISTICS OF A PARTNERSHIP 

1. Nature of Business Associations. — Heretofore we 
have dealt only with contracts which were made, or with 
business which was transacted, by single individuals, 
acting either personally or by means of an agent. We 
now take up the discussion of associations of individu- 
als, which are formed for the purpose of transacting 
business in a manner more advantageous to the mem- 
bers of the association than a business conducted by 
them individually would be. Men who are engaged in 
business, finding that it will be mutually beneficial, 
often join their capital, experience, and labor with 
each other, providing that the profits of the enterprise 
may be shared by the members of the association, either 
equally or in proportion to the capital or business ex- 
perience contributed by each. This is the first step in 
the concentration of capital, energy, and talents. The 
first form of such business associations is the partnership. 

286 



CHARACTERISTICS OF A PARTNERSHIP 287 

2. Who are Partners. — When men have entered into 
the relation of partnership, they subject themselves to 
certain responsibilities, not only for their ov^n actions 
but for the actions of their partners. We cannot fasten 
this responsibility upon any individual until we have 
shown him to be a partner. The first question, there- 
fore, to be investigated is. What do we mean by the word 
"partnership," and when are men partners? Suppose 
that A and B each conduct a retail dry goods store on a 
certain street. They conclude to hire a larger building 
and carry on business under one roof. Their expenses 
are lessened, the attractiveness of the store is increased, 
competition is done away with, and the profits are pro- 
portionately larger. Now suppose that A borrows a large 
sum of money, ostensibly for purposes of the firm, but 
without B's knowledge, and then quietly leaves the 
country. If B is A's partner, he is responsible for the 
repayment of the money borrowed; if he is not A's part- 
ner, then he is under no such obligation. In the case 
here stated, A and B would undoubtedly be partners. 

3. No Agreement Necessary to Create a Partnership. — 
When we say that individuals are partners, we do not 
necessarily mean that they have come together and have 
agreed among themselves that they shall be partners ; 
that they have perhaps drawn up articles of agreement 
which they have signed, and which purport to create 
a partnership. While some partnerships are so formed, 
it is probable that the majority are not thus expressly 
created. 

Parties may assume a partnership relation and 
partnership obligations without intending to do it. 
The law judges whether or not they are partners by 
their actions, even more than by their words. In the 



288 BUSINESS ASSOCIATIONS 

illustration in the preceding paragraph, it is possible 
that A and B thought nothing about whether or not 
they were partners. They were perhaps not aware of 
the fact that joining their stocks and doing business 
together under one name and in one room would con- 
stitute them partners ; but such was the fact. 

4. How to Determine when a Partnership Exists. — It is 
sometimes very difficult to determine whether indi- 
viduals who are associated in business together are or 
are not partners. If A and B were in business together, 
and divided the profits between them, either equally or 
in proportion to the capital which each had contributed 
to the business, it was formerly supposed that they were 
partners, and that it would not be necessary to inves- 
tigate further. 

That view of the case has been modified to some 
extent. It is quite possible for two individuals to 
share profits without being partners. Suppose A lends 
B ten thousand dollars with which to begin business, 
and stipulates that instead of interest he is to receive 
annually two thirds of B's net profits. If A has no 
control whatever over the business, and has nothing to 
do with the active management of it, he is not a partner 
even though he shares the profits. Employes who re- 
ceive a share of the profits of the enterprise, instead of 
wages, are not partners. Thus you see, profit-sharing is 
not necessarily conclusive as to whether two or more 
persons are partners. Another very important element 
to be considered is whether the individuals jointly 
own the property which is being used in the business. 
This, however, is no more conclusive than is the test 
of profit-sharing. It is evidence, but it does not prove 
anything by itself. 



CHARACTERISTICS OF A PARTNERSHIP 289 

5. The Real Test is Co-proprietorship. — The real test as to 
whether or not individuals who are in business together 
are partners, is whether they have a co-proprietorship in 
the business. By this we mean whether each one has 
more or less active control over the management of it. 
If A lends B money, stipulating that he shall receive a 
certain share of the profits, we have seen that so long as 
A has no control over the business, he is not a partner. 

Suppose A had stipulated that no new enterprise 
was to be undertaken without his consent, still he 
would not be a partner; he has a restraining influence, 
but not an active influence over the business. If, how- 
ever, he actively participates in the management of the 
operations which are undertaken, if his advice is sought 
and followed with regard to the initiation of new fea- 
tures, and particularly if he himself is so actively en- 
gaged as to have the power to inaugurate the steps to be 
taken — then he is a partner. It may be safely said that 
if two parties are in business together and share profits 
and own property in common, and each one has some 
control over the business, they are partners. We 
cannot well lay down any rule more definite than this. 
Some one of these elements may be present and the 
others absent, and individuals thus associated may not 
be partners, — probably are not, — but it is impossible to 
say, without knowing all the circumstances of each par- 
ticular case. Of all these elements the most important 
is that of co-proprietorship. 

6. Quasi or Nominal Partners. — It often happens that 
two parties are doing business together when there is 
an express agreement between them that they are not 
partners and shall not be held responsible for partner- 
ship liabilities. The question might arise in such a 



290 BUSINESS ASSOCIATIONS 

case whether it would be right for the law to deem 
them to be partners when they have expressly repudi- 
ated the relation as between themselves — whether, 
indeed, the relation of partnership is not, after all, a 
sort of contract which the parties have made between 
themselves, either impliedly or expressly. After they 
have expressly stipulated that such a relation shall 
not exist, ought the law to fasten the responsibility of 
it upon them ? 

At the same time, looking at the situation from the 
standpoint of a third person, who has dealt with the 
firm believing the individuals to be partners, we can 
see that it makes very little difference to him what 
contract the different individuals may have secretly 
made with each other when he has been relying on the 
apparent partnership between them. If a man acts in 
such a way as to lead other persons to believe that he is 
the partner of another man, he cannot afterwards escape 
his responsibilities toward those who have been deceived 
by his actions. If the third person who was dealing 
with him knew, as a matter of fact, that he was not a 
partner, then, although he may have held himself out to 
the world as a partner, that individual cannot hold him 
responsible. But it is a general rule that whenever a 
man acts in such a way as to deceive the public into 
believing him to be a partner of some one else, he is 
responsible as a partner to all persons who have dealt 
with him under the belief that he held this relation 
to another. Such an individual is a " quasi " part- 
ner. This word comes from the Latin, and means one 
who acts as if he were a partner. Such a relation may 
be formed in perfect good faith, but nevertheless the 
responsibility of partnership attaches. 



CHAPTER II 

PKOPERTY OF THE PARTNER SHIP 

1. Legal Title in the Partners Individually. — Having 

ascertained some of the rules by which we determine 
whether or not individuals are partners, we now assume 
that we have a partnership which is in the possession of 
a business and a large amount of property, and we ask 
ourselves. What is the exact relation of the property to 
the partnership? Who owns the property and who 
may deal with it? 

It is impossible, in an elementary work of this 
character, to go deeply into the nature of a partner- 
ship, viewed from a theoretical standpoint. We may 
observe, however, at this point, that the partnership is 
only a collection of individuals. You cannot think of 
a partnership without thinking at the same time of the 
individuals who compose it. The partnership itself is 
not distinct from its members. We shall see, when we 
begin to study corporations, that a corporation is a legal 
person and is a thing that exists, at least in contem- 
plation of law, entirely distinct from the persons who 
compose it. But it is not so in the case of a partner- 
ship. As we shall see, a corporation may own property 
in its own name ; but it is impossible for a partnership 
thus to own property, because the partnership, as such, 
has no distinct existence. It follows that the legal 

291 



^92 BUSINESS ASSOCIATIONS 

title to the property owned by the partnership must be 
in one or more of the individual members of the firm. 
Suppose A, B, and C are partners : A owns a store ; B 
owns a warehouse; C owns horses and wagons and 
stock. That property may be all property of the firm, 
although the legal title is in these individual persons. 

2. Partners Hold only as Trustees. — Assuming that 
each partner legally owns that particular part of the 
property which stands in his name, we now inquire to 
what extent he may sell it or deal with it irrespective of 
the rights of his fellow-partners. It is clear that com- 
plete freedom could not be allowed, because the busi- 
ness of the partnership could not be satisfactorily 
conducted on such a basis. It is true that each partner 
has a legal title to a portion of the firm property, but 
he holds it as trustee for the partnership. If you are the 
guardian of X, who is a minor, and his property is placed 
in your hands, you cannot deal with that property as you 
see fit. You cannot sell it for your own benefit. You are 
bound to deal with it only for the benefit of X, because 
you are a trustee for X. In the same way the partner 
who holds a legal title to firm property, holds it as 
trustee for the firm, and must use it for the benefit of 
the firm. 

A. Survivorship of Legal Title. — If a partner dies, that 
terminates the relation of partnership between the 
partners. What becomes of the legal title to the prop- 
erty which was owned by that partner and held by him 
as trustee for the firm ? Does it go to his personal rep- 
resentatives so that they may come in and deal with it, 
and thus hamper the adjustment of the business of the 
firm, or is it disposed of in some other way? There is 
a peculiar rule in the common law which applied origi- 



PROPERTY OF THE PARTNERSHIP 293 

nally only to tenants who are known as "joint ten- 
ants." If A and B jointly own a farm, to use the 
expression which was employed to describe this kind of 
tenancy, each one owns the whole and each part of the 
land. This seems to be an absurd statement, but it 
means that the rights of the two jointly extend over the 
whole property. That is, it cannot be said that one 
owns part of the property and the other owns another 
part; both own the whole. In such a case, if A should 
die, the title of the entire property would remain with 
B and would not go to A's heirs. The same rule has 
been applied to the case of partners. If one partner 
dies, the personal property, the legal title to which he 
held as trustee for the firm and which would otherwise 
have gone to his personal representatives, becomes the 
property of the other partners, so that they may deal 
with it as they see fit for the purpose of winding up 
the business. The title to real property does not sur- 
vive, but it may be dealt with almost as if it did by the 
remaining partners. 

B. What Each Partner owns. — We have seen that each 
partner's claim to the property to which he happens to 
have a legal title is only a claim as trustee, and is really 
of little benefit to him personally. A claim to a share 
in a partnership is, however, a valuable one. It may 
then be asked, In what does this valuable property, 
which each partner personally owns, actually consist? 

Suppose A, B, and C are partners, and the firm owns 
a large ofiice building worth five hundred thousand 
dollars. Does each partner have a claim to one third 
of the building, so that he can sell one third of it if he 
chooses ? If he dies, will the title to one third of the 
building go to his heirs ? 



294 BUSINESS ASSOCIATIONS 

We must remember that the firm, as a firm, owes, no 
doubt, certain obligations to third parties. Perhaps 
the building is heavily mortgaged for a firm debt. Per- 
haps there are a number of creditors to whom the firm 
owes money. Perhaps the amount of liabilities is even 
greater than the value of the property. We would 
have to take all these things into account before we 
could even estimate the real value of a share in that 
partnership. Under the last supposition, each part- 
ner's share in the firm would be worth nothing at all. 
It might be perhaps worth even less than nothing. 

In order to estimate the property which each partner 
owns, we must consider it in this manner. Each part- 
ner has a right to share any money which remains after 
all the firm debts have been paid. This is a personal 
claim, and his share in the partnership is personal 
property. In technical language, his right is called 
the right to "have an accounting," that is, the right to 
have the property sold, the money applied to the pay- 
ment of the debts, and the surplus divided among the 
partners. If the property is valuable and the debts 
few, this claim is very valuable. If the property is 
small and the debts large, the partner would be very 
glad indeed to relinquish all rights which he has if, at 
the same time, he could be relieved from all his liabili- 
ties. If he sells his share in the partnership, he does 
not transfer the firm property, or any part of it, to the 
purchaser. He sells only the right to share in the sur- 
plus after all the debts have been paid — he sells the 
right to an accounting. By such a sale of his rights a 
partner cannot introduce another member into the firm, 
but he does give him the right to share what is left 
after the business has been settled up. A new member 



PROPERTY OF THE PARTNERSHIP 295 

can be introduced into the firm only by the unanimous 
consent of all the parties. 

C. To Whom the Partner's Share goes when he Dies. — 
It has been suggested that a partner's share in the firm 
property is personal property. Suppose all the property 
which is owned by a firm is a large lot of real estate. 
Suppose the firm is composed of A, B, and C. A dies, 
leaving an heir, X, and appoints an executor, Y; the 
question is, Does the partner's share go to X, as it will 
do if it is real estate, or will it go to Y, as it will if it 
is personal property ? 

All the property owned by the firm was real property, 
but as soon as it was purchased by the firm it became 
personal property. This is a fiction of the law, invented 
for the purpose of facilitating the transaction of busi- 
ness. The property is treated as being personal prop- 
erty as long as it is owned by the firm. As soon, how- 
ever, as the firm's business is all settled up, and the 
fund is ready for distribution among the surviving 
partners and the representative of the dead partner, it 
is again treated as being real property, and the money 
thus remaining is paid to the heir of the deceased 
partner, and not to his executor. That is the rule in 
this country. In England, it is somewhat interesting 
to know, the proceeds of the sale would go to the 
personal representatives, because it is treated as being 
personal property absolutely, and not real property. 



CHAPTER III 

LIABILITY OF THE PARTNERS 

1. General Nature of a Partner's Liability. — A partner- 
ship relation is one which has long been recognized by 
the common law. The responsibilities of the partners 
have therefore become well settled. The individuals 
who enter into such a relation are the gainers, in that 
they have succeeded in concentrating their capital and 
lessening their expenses, but they do not escape any 
of their usual responsibilities as traders by so doing. 
Partners are under a double liability. In the first place, 
the partnership property is fully liable to the creditors 
of the partnership for all obligations owing to them. 
But if it is not sufficient to pay the debts, the personal 
property of the various individual partners may be 
called upon for that purpose by these creditors of the 
firm. If one of them is compelled to pay the whole 
amount of the firm debt, he may, by bill in equity, 
compel the others to share his loss. 

2. Rights of Firm Creditors when Firm is Solvent. — 
Judging the rights of the creditor of the firm from a 
strictly legal standpoint, as distinguished from an equi- 
table standpoint, he has the right at any time to take the 
property of the firm, or the property of the individual 
partners, to satisfy his claims. As long as the firm 
is solvent, however, — that is, as long as the property 

296 



LIABILITY OF THE PARTNERS 297 

which it owns is greater than the debts which it owes, 
and the firm creditor depends upon the firm property for 
the payment of the debts due him, — his rights will not 
conflict with the rights of any other creditors. It must 
be remembered, however, that not only may a man have 
creditors who have claims against him, by virtue of the 
fact that he is a member of the firm, but that he may 
also have creditors who have claims against him per- 
sonally, which claims have nothing to do with the part- 
nership. In such cases it will readily be seen that 
situations might arise in which the claims of these two 
sets of creditors would conflict with each other. 

3. When the Firm is Insolvent and there is Firm Property. 
— When a firm lias become insolvent, that is, when its 
assets have sunk below its liabilities and the partners 
have decided to give up their business and distribute 
its property among their creditors, then this conflict 
between the different sets of creditors necessarily arises, 
and it becomes the duty of a court of equity to distrib- 
ute the assets among them upon a proper basis. 

We will suppose that A, B, and C are partners. 
Their firm property amounts to 15000. A has no prop- 
erty except his interest in the firm. B is worth f 5000, 
and C is worth |15,000, apart from their interest in the 
firm property. X is a creditor of the firm to the amount 
of 125, 000. Y is a creditor of A to the amount of $2000. 
Z is a creditor of B to the amount of $5000. How shall 
their claims be adjusted? 

X, the firm creditor, may take all the firm property, 
15000. That reduces his debt to |20, 000. Now he may 
take the separate property, if there is any, of A or B or 
C, or all of them. He cannot go to A, for A has no 
separate property. He could go to B for the amount 



298 BUSINESS ASSOCIATIONS 

of the property which he has, $5000, were it not for 
the fact that B himself is insolvent, in that he owes Z 
to the full amount of his property. In the particular 
case which we are discussing, X would go to C and 
take his $15,000 worth of property to satisfy the resi- 
due of his claim, $20,000. Y would not get anything. 
He can get nothing from A's personal property, for A 
has none; he can get nothing by reason of A's relation 
to the firm, because A's share in the partnership is worth 
nothing. Z, the creditor of B, will get B's $5000. 
X, the firm creditor, will get $5000 from the firm and 
$15,000 from C. 

4. "Doctrine of Marshalling." — This is perhaps all 
plain enough, except the reason why X cannot take B's 
property. The reason he cannot depends upon the 
peculiar equitable doctrine known as the "Doctrine of 
Marshalling." In this illustration, X, having taken 
all the firm property there was, had the right to go 
to either B or C. He had two funds from which he 
could attempt to pay himself; Z, however, could not 
take the firm property, for his debt was not a firm debt. 
He could not take property of C, for he had no claim 
upon him. The only fund open to him was that which 
belonged to B, and which amounted to five thousand 
dollars. 

In such a case, if X, either because he wished to 
injure Z, or because he could not get the entire amount 
from C, wished first to go to B and take all his prop- 
erty, equity would step in and forbid him. The court 
would say to him. You have two funds which you can 
take to pay yourself; Z has but one fund; you cannot 
go first to the fund against which Z has his claim, but 
you must leave that to him and first draw upon the fund 



LIABILITY OF THE PARTNERS 299 

against which tliere is no other claim. This is a fair way 
of arranging the matter, otherwise it might be possible 
for X to have been paid in full, whereas Z would get 
nothing at all. 

The foregoing principles may be stated as follows: 
The firm creditor has a prior right to take the firm's 
estate for the payment of his debt; the separate creditor 
(?.e., one who has a personal claim against a partner) has 
a prior right to take the separate property of the partner 
against whom he has his claim, for the payment of his 
debt. If the separate partner has any property left, the 
firm creditor may take that, but he may not make any 
claim upon the separate property of the partner until 
all the separate creditors have obtained the amount of 
their debts. This is fair, because the firm creditor, 
when he contracted with the firm, was relying chiefly 
upon the credit of the firm property and not upon the 
credit of the separate partners. At any rate, inasmuch 
as he has the first claim to the firm property, he should 
not also have the first, or even an equal claim, to the 
separate property, but should leave that to the prior 
claim of the separate creditor. 

5. When there is no Firm Property. — The principles 
which we have just stated apply only to cases where 
there is property belonging to the firm. If there is no 
property belonging to the firm, inasmuch as there is 
nothing at all with which to satisfy the claim of the 
firm's creditor except the separate property of the differ- 
ent partners, he is allowed to come in equally with the 
separate creditors. If a partner has personal property 
amounting to 810,000, and a firm creditor and a separate 
creditor each has a claim of $10,000, which will get the 
property? It will be equally divided between them; 



800 BUSINESS ASSOCIATIONS 

each will receive 15000. Again, as you see, this is a 
fair and equitable method of arranging the claims be- 
tween the parties, for the reason that otherwise the 
separate creditor would be paid in full, whereas the 
firm creditor would get nothing. 

6. When a Partner is Dead. — ^ If a partner dies, the 
liability of his estate for the payment of both firm and 
separate debts is precisely the same as if he were liv- 
ing. As we have already stated, the surviving partners 
may use the property to which the dead partner held 
the legal title for the purpose of settling up the ac- 
counts of the firm and closing up the business. They 
cannot, however, subject the estate of the decedent to 
any new obligations, other than such as are absolutely 
necessary in order to conclude the business. 

Suppose A, B, and C are partners ; C dies, and A and 
B give a promissory note for a large amount of money 
to engage in a new venture. They may contend that 
they did this in order to wind up the business, but 
unless it is conclusively shown to have been done for 
that purpose in good faith, the estate of C would not 
be responsible. The estate of the dead man will be 
bound only by the liability which he was under at his 
death. 



CHAPTER IV 

CONDUCT OF THE BUSINESS 

1. Power of the Firm to Dispose of its Property; When 

Insolvent. — When we take up the discussion of the 
conduct of the business of a firm, we shall find that 
there are two things to be considered. The first is, the 
power of the firm to do certain acts, and the second, 
whether or not the persons signing the contract or 
conducting the negotiations had the power to act on 
behalf of the firm. The first question, which we shall 
dispose of briefly, is as to the power of the firm. 
Assuming that the firm acts with the consent of all 
the partners, it has the power to dispose of the property 
which it owns, and to free that property from any re- 
sponsibility for the payment of the firm's debt, pro- 
vided it is solvent at the time of the transaction. 

But suppose A, B, and C are partners and the firm 
is hopelessly insolvent. Discovering this fact, which 
has not as yet become known to the public, they decide 
to sell off all their remaining property, pocket the 
money, and leave the country; which they proceed to 
do. Suppose they have sold a very valuable building to 
X, for which X has paid a good price. The firm credit- 
ors, finding themselves cheated out of their money, 
in trying to discover some firm property with which 
to satisfy their claims, find this building and wish to 
take it. X objects, saying he is the owner of it, as he 

301 



302 BUSINESS ASSOCIATIONS 

bought it from the firm. The question is, Does that 
sale stand? In such a case as this one it would not. 
A firm which is insolvent cannot transfer its property 
so as to defeat the claims of its creditors. 

2. When Solvent. — If, however, the firm at the time 
of the sale of the property was solvent, that is, if it 
was at that time fully able to pay its obligations, the 
sale is good. No creditor can successfully ask to have 
it set aside. It has been thought that if a firm sold 
property at a time when it was actually insolvent, but 
when it honestly believed itself to be solvent, that such 
a sale would be good. This view, however, is erroneous, 
since from the standpoint of the creditor it makes no 
difference whether the firm thought it was solvent or 
not. The one question which can concern him is 
whether the firm was in fact able to meet its obligations 
at the time the property was disposed of. 

3. Each Partner the Agent of his Fellows. — We have 
before indicated that when several individuals enter 
into the relation of partnership, each one becomes, to 
some extent at least, the agent of the others, so that 
if one partner makes a contract or enters into an obliga- 
tion which purports to bind the firm, this will bind it, 
unless the partner has done some act which he had no 
authority to do. It then becomes important to know 
for what purposes and to what extent each partner is 
the agent of his fellows. It may be stated that the 
partner is a general agent, and has power to bind the 
firm for all acts done in the usual course of the business 
of the firm, and that no secret limitations of this gen- 
eral agency can affect the rights of third parties. 

Each partner has full authority to make simple con- 
tracts, which will bind his fellows. It is understood. 



CONDUCT OF THE BUSINESS 803 

however, that these contracts shall be those usually 
made in the course of the business which the firm is 
doing. It can readily be seen how impossible it would 
be to carry on the ordinary business of a partnership, 
if it were not permissible for each member of it to 
bind the others for the small business operations which 
must be conducted every day. 

Sometimes a question arises, when a contract has 
been signed by one who has ceased to be a partner. 
In such a case, if the notice that he has withdrawn 
from the firm has not been given to the persons who 
were accustomed to deal with him, a contract which he 
makes with them will bind the firm just as much as if 
he were still a partner. With regard to the question 
of notice, actual notice must be given to what are known 
as "prior dealers," that is, to persons who have been 
accustomed to deal with the firm and with the with- 
drawing partner. As to those who have not been 
accustomed to deal with the firm, a notice of the with- 
drawal by publication is sufficient to protect the re- 
maining members from responsibility for any contracts 
made by the withdrawing partner after his withdrawal. 

4. Sealed Instruments. — Although a partner may make 
simple contracts on behalf of his firm, it is an absolute 
rule that he cannot execute a sealed instrument unless 
he has been given special authority. You have already 
learned that an agent cannot execute a sealed instru- 
ment on behalf of his principal, unless his principal has 
given him the sealed authority to do so by means of an 
instrument called a power of attorney. The same rule 
holds in the case of a partnership. If A, B, and C 
are partners, and C is to make a sealed contract on 
behalf of the firm, A and B must execute a power of 



804 BUSINESS ASSOCIATIONS 

attorney to him giving him that authority, or his con- 
tract will not bind the firm. 

5. Negotiable Contracts. — When we come to the sub- 
ject of negotiable contracts in this connection, it must 
be borne in mind that a bill or note is halfway 
between a sealed contract and a simple contract. As 
we have learned from our discussion of negotiable con- 
tracts, a bill of exchange or a promissory note has a 
certain value by reason of its form, and when it is in 
the hands of an innocent third party it does not need 
to be supported by a consideration : to that extent it 
resembles a sealed contract. 

It will be seen, therefore, that while a partner has 
power to execute negotiable papers and to bind his firm, 
his power is limited. When he is acting for the benefit 
of the firm and is strictly within the scope of the firm 
business, he may bind his fellows by executing nego- 
tiable paper. If, however, one partner signs a prom- 
issory note purporting to bind the firm in payment of 
his individual debt, the presumption is that he has no 
authority. The separate creditor in such a case cannot 
recover upon the paper, unless he shows that he had 
every reason to believe that the paper was given to him 
for a firm transaction. In the same way, if a paper is 
executed by a partner, in the firm name, but for his own 
accommodation, the holder cannot recover unless he 
proves that he was innocent when he took it. Usually, 
the burden of proof would be upon the firm to show that 
he was not innocent, but here the burden of proof is 
shifted. If the paper is given for a transaction which is 
clearly in excess of the authority of the partner, then it 
will not bind. If it is not an excess, but what is known 
as "abuse " of authority, it is said that it will bind the 



CONDUCT OF THE BUSINESS 305 

firm nevertheless. There is no essential distinction be- 
tween these two classes of cases. When the court says 
"excess of autliority," it means that the partner has 
gone outside the business of the firm; when it says 
"abuse of authority," it means that he has gone too 
far in carrying out some line which he might legiti- 
mately follow. 

The only real difference between the power of a part- 
ner to execute negotiable paper and his power to execute 
simple contracts, is that in the former case the courts 
are much more strict in the interpretation of his 
power, and call for a greater exercise of good faith by 
the parties with whom he is dealing. 

6. How the Partnership may be Dissolved. — A firm is 
composed of a certain number of individuals. If the 
relation existing between them is disturbed, the part- 
nership is at an end. If any one of them dies, or 
withdraws from the firm, this operates as an instant 
dissolution. This withdrawal may be effected by a 
sale of his share in the firm to some third party, or 
by his insolvency, or by his simple withdrawal. It 
will also be brought about if he becomes incapacitated 
from carrying on business because of insanity. It 
goes without saying that a firm may dissolve itself by 
the mutual consent of the parties, and it is almost as 
obvious that the insolvency of the association will bring 
about the same result. Sometimes, also, the articles of 
co-partnership, as first drawn up, provide for the ter- 
mination of the relation at a time specified. The 
expiration of the time would therefore dissolve the part- 
nership. 



SECTION II 
COEPOEATIONS 



CHAPTER I 

ESSENTIAL CHARACTERISTICS OF A CORPORATION 

1. Distinction between a Corporation and a Partnership. 
— We now take up the second form of business asso- 
ciation, known as a corporation. A corporation is 
essentially different from a partnership in two impor- 
tant respects. The first distinction relates to the 
nature of a corporation itself. We have learned that 
a partnership is merely an association of individuals, 
and that it is impossible to consider the partnership 
existing apart from the persons who are its members. 
We have also seen that the death of one partner will 
destroy the partnership. 

But what is true of a partnership is not true of a 
corporation. The corporation has a distinct personal- 
ity of its own, being a legal person existing separate 
and distinct from the members who compose it. If you 
are suing a firm composed of A, B, and C, you are 
suing three persons, — A, B, and C, trading perhaps as 
the firm of A, B, C and Company. If a number of in- 
dividuals form a corporation, called the Pennsylvania 

306 



CHARACTERISTICS OF A CORPORATION 807 

Railroad, and you sue that corporation, you do not sue 
A, B, C, D, and E, the members of that corporation, 
but you sue the Pennsylvania Railroad. It has an 
existence which is entirely distinct from the existence 
of the individual members. 

The second important distinction is one which we 
shall not discuss at this point, but will take up later, 
namely, that the individual members of a corporation 
are not liable personally for the debts contracted by 
the corporation, as partners are liable for debts con- 
tracted by the partnership. When a man purchases 
stock in a corporation, and thereby becomes a member 
of it, he risks only the money which he has invested, 
except in cases where by statute a greater liability 
has been created. 

2. Definition. — A great many different definitions 
of a corporation have been given. It is not necessary 
to perplex the student with an enumeration of these 
technical definitions. Perhaps the best known is the 
one which was given by Mr. Chief Justice Marshall in 
the famous Dartmouth College case, when he said, " A 
corporation is an artificial being, invisible, intangible, 
and existing only in contemplation of law." This 
artificial, intangible being, created by individuals who 
unite together according to- law, is endowed with 
certain attributes by the government under which it 
is organized. Being not a natural but an artificial per- 
son, it has no power to act until such power has been 
conferred upon it by the sovereignty which created it. 
The character and the limitations of these powers we 
will discuss later. What we desire to emphasize here 
is, that the corporation has a distinct existence, and is 
what may be called an artificial being. 



308 BUSINESS ASSOCIATIONS 

3. How a Corporation is Created; its Attributes. — It 
may be seen from this brief discussion that there are 
certain very great advantages attached to the method 
of carrying on business by forming a corporation for 
that purpose. The principal advantage is the fact 
that the individuals who thus invest their capital risk 
nothing beyond the actual amount which they put in. 
Moreover, where a great many persons are interested in 
the business, it can be conducted much more advanta- 
geously by the officers of a corporation than it could be 
by a partnership, where all have more or less power to 
act. For these reasons, corporations are multiplying 
very rapidly all over the country. It is now quite a 
usual thing for business or manufacturing companies 
to become incorporated. 

In order to establish a corporation it is necessary 
only for a certain number of individuals, usually five, 
but sometimes more or less in different states, accoj-ding 
to their particular statutes, to organize themselves as 
an association, and to apply for a charter to the state in 
which they are seeking incorporation. If the purpose 
for which they desire incorporation is a lawful one, 
and one which is sanctioned by the laws of the state 
where application is made, a charter, which is a certifi- 
cate of incorporation, will be granted. This charter, 
or certificate, confers upon the invisible, intangible 
being created by it, the attributes which are to attach 
to it and the powers which it is to exercise. It 
usually confers the right to exist as a corporation ; the 
right to have a name, therein designated; the right to 
have a corporate seal, which shall be attached to con- 
tracts; the right of perpetual succession (that is, the 
privilege given to each member of the corporation to 



CHAKACTERISTICS OF A CORPORATION 309 

sell his interest, usually represented by a certificate of 
stock, to some other person, without in any way affect- 
ing the existence of the corporation itself) ; and, finally, 
the right to make by-laws, according to the purpose for 
which the charter is granted. 

4. Organization of a Corporation. — When applying for 
a charter, the applicants must state that they have 
organized themselves into a company with the intention 
of exercising the privileges to be conferred upon them 
by the charter. This association is governed by officers 
who are elected for that purpose. The governing board 
is usually composed of officers called directors ; in addi- 
tion to the board of directors there are such officers as 
president, secretary, treasurer, etc. The stockholders 
(who are the persons forming the corporation), as such, 
have no direct voice in the management of the busi- 
ness. As we shall see, they have the right to vote 
for the officers, but their power stops at that point. 
Here, again, we see a very essential distinction be- 
tween a corporation and a partnership. Each partner 
has not only the right to act on his own behalf, but also 
on the part of his fellows. A stockholder of a corpo- 
ration has not even the right to act directly on his own 
behalf. He can do little except indicate whom he 
wishes to hold the offices to which the power to act is 
attached. 

5. Power of the Corporation. — The charter which con- 
fers corporate life upon the intangible being, also confers 
upon it its capacity to act. If the individuals who have 
organized a corporation apply for a charter for the pur- 
pose of carrying on a manufacturing business, the 
charter confers upon the corporation the power to 
manufacture. If they apply for a charter for the pur- 



810 BUSINESS ASSOCIATIONS 

pose of carrying on the business of wholesale dry goods 
merchants, the corporation is given the power to carry 
on that kind of business. If they apply for a charter to 
operate a railroad, the corporation may operate a railroad ; 
but in no one of these cases has it the power to make 
any contract or do any act whatever not in the further- 
ance of the purpose for which it was organized. 

We shall hereafter deal with the effect of a corpora- 
tion overstepping the bounds laid down for it in the 
charter. The point we desire to emphasize here is that 
this artificial person created by the charter does not 
have all the power of a natural person, but only the 
powers pertaining to the business for which it has 
been created, including the power to contract, to borrow 
money, and to do any act ordinarily necessary for car- 
rying on the particular business in which it is engaged. 
If a corporation organized for the purpose of operating 
a railroad, speculates in land or engages in the whole- 
sale fruit business, it has gone beyond its power and 
has violated the terms of its charter. 

6. Perpetual Succession. — We have briefly referred to 
that attribute of a corporation which is known as per- 
petual succession. When a corporation is organized, 
those who are members of it, and who have invested their 
money for the purpose of carrying on the business, are 
said to own the stock of the corporation. Carrying 
out further the idea of an artificial person, the corpora- 
tion itself issues a certain number of shares of stock; 
the individual members then purchase this stock, and 
pay the money into the treasury of the corporation. 
The corporation then uses the money in carrying on the 
business. The members holding the stock are called 
stockholders. Ownership of stock conveys certain 



CHARACTERISTICS OF A CORPORATION 311 

rights and liabilities, which we will discuss in the 
proper place. Among them is the privilege of selling 
the stock to other persons if they choose to do so. This 
is what is done in the stock exchanges of all the great 
cities of the country, where hundreds of thousands of 
dollars' worth of stock changes hands daily. The pur- 
chaser becomes a member of the corporation, by virtue 
of the fact that he has bought the stock. If a stock- 
holder dies, his personal representative becomes a mem- 
ber of the corporation, because the stock has come to 
him in his capacity as a personal representative of the 
deceased. This is another particular in which corpo- 
rations differ completely from partnerships. 

7. Citizenship. — Necessarily, when shares of stock are 
continually changing hands, members of the corporation 
live in different parts of the country. Suppose a cor- 
poration to have been organized in the state of Pennsyl- 
vania. Subsequently the stock, after having passed 
through the hands of different purchasers, all comes 
into the hands of people who live in the states of New 
York, New Jersey, and other states, and none of whom 
live in Pennsylvania. The question then might arise 
as to where the corporation is a citizen. Would it be 
a citizen of the state where it was organized, or would it 
be a citizen of the state where the majority of its stock- 
holders live ? It would be a citizen of the state where 
its charter was granted. Even though ever^^ member of 
it may be a resident and citizen of another state, and 
even of another country, that does not change the 
citizenship of the artificial person. Its citizenship is 
fixed by its charter. 

A. Shares of Stock are Personal Property. — In discuss- 
ing partnership, we saw that each partner's share was 



812 BUSINESS ASSOCIATIONS 

treated as personal property as long as the firm was 
carrying on business, but that it was treated as real 
property at the death of a partner, if the property 
which it represented was real property. Suppose a cor- 
poration is doing a land business, and has no property 
except real estate. You are the owner of a large num- 
ber of shares of stock. Are you the owner of real estate, 
or are you the owner of personal property? If you 
should die, would your shares of stock go to your heir, 
or would they go to your personal representative ? They 
would go to your personal representative, as shares of 
stock are not real property, but always personal prop- 
erty, no matter what may be the character of the prop- 
erty owned by the corporation. A share of stock merely 
represents certain rights which a stockholder has. It 
does not represent a share in any property owned by the 
corporation itself. 

8. How a Corporation may be Dissolved. — Having seen 
how a corporation may be created, we now ask how it 
may be destroyed. There are five ways in which a 
corporation may come to an end. In the first place, its 
charter may have been granted for a limited time, say 
fifty years; at the end of that period the corporation 
dies a natural death. Secondl}^, the charter may be 
repealed by the legislature of the state which granted 
it, if the original charter contains a clause, which most 
modern charters do, providing that it may be repealed 
at any time. Thirdly, the charter may be surrendered 
voluntarily by the corporation, with the consent of the 
state, or it may be forfeited for some wrongful act 
which has been done by the corporation and for which it 
has been called to account by the attorney-general of 
the state. This forfeiture would have to be brought 



CHARACTERISTICS OF A CORPORATION 313 

about by the decision of a court. Lastly, it is generally 
considered that if all the members of a corporation die, 
so that there are no stockholders left, it then ceases to 
exist. This view of the case is a little hard to under- 
stand when we remember that the corporation is entirely 
distinct from its members, but nevertheless such is the 
law. 



CHAPTER II 

LIABILITY OF STOCKHOLDERS OF A CORPORATION 
REGULARLY ORGANIZED 

1. Liabilities of Subscribers to Stock. — When a man 
purchases stock he thereby becomes a member of the 
corporation. If he has not purchased outright, but has 
only agreed to subscribe, he has then made a contract 
by which he is obliged to pay for the stock and accept 
it according to his agreement. Suppose, however, that 
at the time he subscribed to the stock, the corporation 
was not in existence. Suppose A, B, and C are at- 
tempting to organize a corporation for the purpose of 
carrying on a manufacturing business. They wish to 
raise a sufficient amount of capital to start. In order 
to do so, it is necessary to get a number of moneyed 
men to subscribe to the stock of the new corporation ; 
by so doing they agree to pay the par value of the stock 
into the coffers of the artificial person, so that it may 
begin business. Will such a contract bind? 

Suppose A came to you and induced you to subscribe 
to ten thousand dollars' worth of stock. The corpora- 
tion is afterwards organized, and you are offered your 
shares of stock and invited to pay your money. You 
have, however, reconsidered your determination, and 
refuse to do so. It may be argued that the corporation 
cannot force you to pay, because at the time you made 
your contract the corporation did not exist; therefore, 

314 



LIABILITY OF STOCKHOLDERS 315 

there is no binding contract, because you could not have 
made a contract with a being not then in existence. 
This argument was at one time accorded some consider- 
ation, but it has now been abandoned. If you subscribe 
to the stock of a corporation, and agree to accept and 
pay for it at a particular time, you will have to live up 
to your contract, even though the corporation was not 
in existence when the agreement was made. Perhaps 
the best theory upon which this view of the case is 
justified is, that you have made an offer to purchase 
stock, which offer is to remain open until a corporation 
is organized, and you are bound by your agreement 
with the promoters not to withdraw it. As soon as the 
corporation is organized, that constitutes an acceptance 
of the offer which you have made. You cannot after- 
wards retract, consequently you are bound. Whether 
we can theoretically justify the conclusion or not, it is 
universally sound law that such a subscription will bind. 
2. Conditional Subscriptions. — Sometimes a man sub- 
scribes to the stock of a corporation only conditionally. 
A was the owner of a farm, and was very anxious to 
have a railroad run across it, as he had a great deal of 
produce to ship to the city. He subscribed ten thou- 
sand dollars to the stock of a certain railroad, on con- 
dition that a station should be put on the corner of his 
farm, which condition was agreed to by the organizers 
of the company. The railroad was built, but it did not 
come within two miles of the farm of the subscriber, 
and of course no station was erected on his land. He 
refused to accept and pay for the stock. The question 
was whether he could be compelled to do so. In most 
states in this country he would not be compelled to 
pay, under those circumstances. 



316 BUSINESS ASSOCIATIONS 

There is a strong argument which could be made, 
however, against such a rule, by saying it is a fraud 
toward the other stockholders for a man to subscribe to 
stock with a secret condition attached to his subscription. 
Other men would see his name on the subscription 
books, and they might agree to purchase stock because 
of the additional security which was offered by reason 
of his being one of the promoters. The argument then 
says that it would not be right to allow him to withdraw 
on account of the non-fulfillment of the condition, 
which did not appear upon the subscription book, and 
which was known only to him and the men with whom 
he had contracted. 

On the other hand, it does not seem fair to force a man 
to subscribe to stock, when his only reason for subscrib- 
ing in the first place was the hope of getting a station 
upon his land — in which he has been disappointed. 
If the condition is of such a nature that the court thinks 
it was intended to deceive the public, then, in all states, 
the subscriber would be compelled to pay, even if the 
conditions were not fulfilled. But where the condition 
is such a one as indicated, the subscriber would be ex- 
cused from his subscription in nearly all the states. 
In Pennsylvania he would probably have to pay, under 
any conditions, but that view of the law is perhaps 
erroneous. It is certainly not approved in other juris- 
dictions. 

3. Liability of Stockholders limited to Capital Invested. — 
As previously indicated, the stockholder of a corpo- 
ration risks only the capital which he invests. If he 
pays ten thousand dollars into the coffers of the cor- 
poration, in return for which he gets ten thousand 
dollars' worth of stock, he has embarked ten thousand 



LIABILITY OF STOCKHOLDERS 317 

dollars in business. If the business of the corporation 
prospers, he will, no doubt, receive dividends upon his 
stock, that is, he will receive his share of the profits. 
If the business of the corporation is a disastrous failure 
he loses his ten thousand dollars, but the creditors can- 
not come upon his property for the payment of their 
obligations. In that respect he is in a much better 
situation than a partner. That is the reason why so 
many enterprises, both small and large, prefer to become 
incorporated rather than to risk the whole fortunes of 
their members by conducting their business on a part- 
nership basis. 

4. Stockholder Bound to pay for his Stock in Full. — We 
will now assume that a corporation has been regularly 
organized and is doing business, and that A is an origi- 
nal subscriber to the stock. Suppose that the promoters 
of the company have had some difficulty in getting the 
requisite amount of capital, — as often happens when a 
new company is being launched, — and, in order to gain 
support, they have been offering to sell stock at twenty- 
five per cent, of its face value. That is, although the 
purchaser receives ten thousand dollars' worth of stock, 
he pays for it only twenty-five hundred dollars. Upon 
this stock he is entitled to receive dividends as if he had 
paid the full amount; and upon the books of the com- 
pany it would appear that he had paid the full amount, 
and the treasury of the corporation would appear to be 
in much better condition than it really is. 

In such a case, suppose X, after an examination of 
the books, loans a large sum of money to the corporation. 
Business is bad, and the money is not repaid. X investi- 
gates, and finds out that A, who purchased on the terms 
mentioned, has never paid in the full value of his stock. 



318 BUSINESS ASSOCIATIONS 

He may then force him to do so, in order that the money 
shall be applied to the payment of the debts of the cor- 
poration. 

When a man subscribes to the stock of a company 
which is being organized, he agrees that the amount of 
the face value of the stock which stands in his name 
shall be used for the payment of the liabilities of the 
new company. No agreement which he may have made 
with the corporation itself will excuse him from actually 
paying that money into the treasury for the benefit of 
the creditors. He is considered by the courts to be in 
the same position as if he held an amount of money 
equal to the face value of the stock, as trustee for the 
benefit of creditors who have loaned money to the cor- 
poration, relying upon the apparent amount of funds in 
the treasury. If this particular creditor had loaned 
money to the corporation before A had subscribed to the 
stock, he could not force A to pay, because he would 
not be deceived under those circumstances, or in any 
way injured by A's secret contract. As long as the 
rights of creditors did not intervene, the contract, as 
originally made, would stand. 



CHAPTER III 

LIABILITY OF STOCKHOLDEKS OF AN IRREGULAR 
CORPORATION 

1. When a Creditor Seeks to hold Stockholders as Partners. 

— Sometimes tlie individuals who have banded together 
for the purpose of forming a corporation, do not properly 
conform to all the legal requirements. Some state laws 
provide that a corporation shall not come into existence 
until three fourths of the face value of its stock shall 
have been paid into the treasury in cash. Suppose that 
in a particular case only one fourth of this amount has 
been paid in, but that the corporation begins business 
in spite of that fact. Under such circumstances the 
corporation was never regularly formed at all. Accord- 
ing to the state law it cannot come into existence until 
the stipulated amount has been paid in. Under such 
conditions, suppose you have lent a large sum of money 
to this irregularly formed corporation. You fail to 
recover the amount of your debt from the corporation, 
because there are not enough funds in the treasury. 
You discover that the corporation was never regularly 
formed, and you seek to hold the stockholders person- 
ally responsible for the payment of your claim, upon 
the theory that as they have been trading together, shar- 
ing profits, etc., and as they have never secured corpo- 
rate immunity as stockholders, for the reason that no 
corporation was ever formed, therefore they must be 

319 



320 BUSINESS ASSOCIATIONS 

partners, and you have the right to recover against 
them as such. 

2. De Facto Corporations. — If there really was no 
attempt at creating a corporation made in good faith, 
then this argument might be allowed by the court. In 
most cases, however, — certainly in the case we have just 
mentioned, — the attempt to form a corporation would 
not result in forming a partnership, but would form what 
is known as a "de facto" corporation. The "de facto" 
corporation is an association which has been formed by a 
group of individuals who started out with the intention 
of forming a regular corporation. It must appear that 
they were honest in their efforts to become incorporated, 
that there was a valid law under which they might have 
become incorporated if they had properly conformed to 
it, and that they have really organized themselves and 
have carried on business as a corporation. If all these 
elements combine, and we have what is known as a 
" de facto " corporation, then the stockholders cannot 
be charged as partners. 

It is said that the failure to conform to the law 
injures no one except the state. The state makes cer- 
tain stipulations which must be conformed to before 
the corporation is formed. If these requirements are 
not conformed to, it is the state that is injured, and 
therefore the state has the right to complain (acting 
through its attorney-general), and to take away the 
charter of the corporation if it sees fit. But if some 
third party has dealt with the company, believing it 
to be a corporation, and relying upon its corporate 
credit and not upon the individual liabilities of its 
members, he is not allowed to come into court and say 
that he did not deal with a corporation, but with a 



LIABILITY OF STOCKHOLDERS 321 

partnership. As he has made a contract with a cor- 
poration, he cannot now pretend that he thought it to 
be a partnership. He is not injured by the fact that 
the corporation was irregularly formed, but by the cir- 
cumstance that the treasury was empty. 

3. ^' One Man " Companies. — It often happens that a 
man who is carrying on a hazardous business desires to 
have his business incorporated, for the purpose of secur- 
ing immunity from personal liability in case his busi- 
ness turns out to be disastrous. A, in order to conform 
literally to the law, associated with himself his wife, 
two of his children, and his brother, in order to make 
the necessary five persons, and then applied for a charter 
in the regular manner, and became incorporated for the 
purpose of carrying on the same business which he for- 
merly carried on alone. This corporation, as you can 
see, was really formed of only one individual, viz., A. 
He was the only one who was the bona fide owner of 
stock; he was the only one who had anything to do with 
the business; he himself probably filled all the offices. 

The pretended corporation became insolvent, and the 
creditors sought to hold A personally responsible for 
the payment of their debts. A claimed immunity on 
the ground that he was only a stockholder in the corpo- 
ration. There has been some conflict of authority as to 
what would be the result reached in similar cases. It is 
apparent that A literally conformed to the requirements 
of the statute. Five individuals associated themselves 
together, and formed a corporation according to law. 
How, then, is it possible to go back of this apparently 
regular corporation and charge A personally ? Ameri- 
can courts take the view that the act of legislature, 
when it says five persons must associate together to 



322 BUSINESS ASSOCIATIONS 

form a corporation, means that there must be five hona 
fide stockholders, and. that if one man associates with 
him other members of his family, or other persons who 
are not really interested, but who join with him only 
for the purpose of furthering his private ends, the act 
has not been conformed to. In this instance five hona 
fide men had not associated themselves together, but 
one man and four individuals who were mere cat's- 
paws, termed " straw " men ; therefore A could be held 
personally responsible for the payment of the debts of 
the corporation, as he was in the case given. 



CHAPTER IV 

RIGHTS OF STOCKHOLDERS 

1. The Right to Vote. — One of the essential distinc- 
tions between the corporation and the partnership is, 
that while the partner has an almost unlimited power 
to control the business, the stockholder's power is re- 
stricted almost to the right to vote. He has certain 
limited rights to restrain the management of the busi- 
ness, which we will discuss in the next paragraph, but 
the principal right which he has in respect to the busi- 
ness of the corporation, is the right to vote. 

Every stockholder has the right to vote, as a neces- 
sary incident of his ownership of stock. This includes, 
first, the right to elect ofBcers, and, second, the right 
to vote for certain fundamental principles which are 
thereby embodied in the constitution and by-laws of 
the company; and sometimes he may assist in deciding 
upon the general policy upon which the business is to 
be conducted. This right to vote may be delegated to 
some one else temporarily if the charter and by-laws of 
the corporation permit it. The person to whom the 
right to vote is temporarily given, and who votes in- 
stead of the stockholder, is called the "proxy." 

This is a very important matter, because often, in 
order to facilitate the business of a great corporation, 
the stockholders w^ill give their votes to one "proxy" 

323 



324 BUSINESS ASSOCIATIONS 

or to a small committee who, therefore, have the entire 
management of the business within their control. This 
committee to whom the entire voting power is given is 
called a "voting trust." It was formerly questioned 
whether it was permissible for all the voting power of 
a corporation to be given to two or three individuals in 
this manner. It has, however, been decided that it is 
not illegal, and may be done for a proper purpose. 

No agreement, however, which a stockholder may 
make, in reference to giving his power to vote to a 
proxy, can prevent him from withdrawing that power 
at will. These " voting trusts " are organized very 
often when it is particularly desirable to commit the 
corporation definitely to a certain line of action. Par- 
ticularly is this true in cases where a number of cor- 
porations wish to combine in the form of monopolies, 
or, as they are called, trusts. Almost the first step 
necessary to accomplish this is to get the voting power 
of all the corporations concerned, into the hands of two 
or three men, who will then run all the corporations in 
the interests of the trust. A voting trust formed for such 
purposes as that would probably be declared illegal. 

2. Rights with Respect to Management. — With respect 
to the actual management of the business, the stock- 
holder has very little to do. The active management 
is conducted by the directors, assisted by the president, 
secretary, treasurer, etc., who are regularly elected 
officers of the corporation. If a stockholder has reason 
to believe that the directors are conducting the man- 
agement in a manner detrimental to his interest, he 
may have access to the books by obtaining the proper 
authority from the court, provided he alleges his spe- 
cific reason for wishing to review them. 



KIGHTS OF STOCKHOLDERS 325 

If the directors are doing acts which are beyond the 
power of the corporation, a stockholder may file a bill 
in equity to restrain them. If he Avere not allowed 
to do this, the directors might proceed to perform these 
acts and subject the charter to the liability of forfeiture, 
which would be an irreparable injury to the stockholder. 

In the same way, if the directors are acting in a 
fraudulent manner, — for instance, if they are paying 
themselves enormous salaries so as to use up the profits 
and leave no dividends for the stockholder, and the lat- 
ter is unable, for some reason, to have the directors put 
out of office, he may file a bill in equity to restrain 
them from conducting the business in this improper 
manner. The stockholder also has an inalienable right 
to maintain the corporation for the purpose for which it 
was originally organized. Even if he is of the minor- 
ity, if he purchases stock in a corporation which is 
doing the business of running a railroad, and the 
majority of the members of the corporation desire to 
procure a new charter, and to engage also in the busi- 
ness of running steamboats, he may prevent them from 
doing this by a bill in equity. Further than this, the 
stockholder's rights are very limited, — he has no 
active control over the business. 

3. Right to receive Dividends. — The principal benefit 
which the stockholder gets is his right to draw divi- 
dends. The term " dividends " is used instead of prof- 
its. Whenever the business of the corporation has 
resulted in a net profit over and above the running 
expenses, etc., and this profit has reached a sufficient 
size to warrant its distribution among the various stock- 
holders, the company, through its directors, declares 
a dividend. These officers ascertain by simple calcula- 



S26 BUSINESS ASSOCIATIONS 

tion what percentage of the face value of the stock can 
be paid out as profit to all the stockholders ; they then 
make a formal statement to that effect, and pay divi- 
dends to all stockholders, according to the amount of 
stock which each holds. 

In many corporations there are two classes of stock, 
known as common stock and preferred stock. If you 
are a holder of preferred stock, you are entitled to 
receive a dividend up to a certain percentage, which is 
indicated in the certificate of stock, before the holders 
of common stock get any dividends at all. The pre- 
ferred stock is therefore apt to sell at a higher figure 
than the common stock. 

Sometimes the business has been profitable, but 
the directors, for some reason, do not see fit to de- 
clare a dividend. If, in such a case, the stockholders 
feel aggrieved because no dividends have been declared, 
have they any means of forcing the directors to declare 
a dividend? In a court of equity at the present day, a 
stockholder may file a bill to force the directors to de- 
clare a dividend, if it clearly appears that they are 
improperly holding back the net profits. Some courts 
take the view that as directors have a very large dis- 
cretionary power, they cannot be forced to declare a 
dividend unless there has been bad faith on their part. 
Others say that if the directors have no reasonable 
ground for not declaring a dividend, they are bound 
to do it. If the directors are about to declare dividends 
illegally, they may be restrained by the stockholders; 
but, as a rule, the entire management of this question 
is left in their hands. 

4. Right to Share in the Surplus remaining after the Cor- 
poration is Dissolved. — The stockholders also have a 



RIGHTS OF STOCKHOLDERS 327 

right to the property owned by the corporation, after the 
latter has ceased to exist. As we have pointed out, 
while the corporation is in existence the property is not 
owned by the stockholders, but by the corporation itself. 
It was formerly thought that when the corporation ceased 
to exist, this property would revert to the state. This 
view, however, has now been abandoned; and it is well 
settled that if the corporation has ceased to exist in any 
of the ways enumerated above, and its debts have been 
paid in full, then the surplus remaining should be 
distributed to the stockholders, in proportion to the 
face value of the stock which each holds. 

5. Transfer of Shares of Stock. — A stockholder's right 
in a corporation, as represented by his certificate of 
stock, is personal property. It may be bought and sold 
just like personal property, as we have already explained. 
We have not, however, indicated the manner in which 
these transfers may take place. Not only has the stock- 
holder a certificate of stock to represent his claim, but 
his name is recorded upon the books of the company as 
the legal owner of the stock. Provision is usually made 
by all corporations that no person shall be recognized as 
a stockholder of the company, or be entitled to divi- 
dends, or the right to vote, until his name has been 
properly entered upon the company's books. 

Suppose you are the owner of a certificate of stock 
which you desire to sell to me. You transfer it to me, 
but do not have the transfer recorded upon the books 
of the company. You are still the legal owner of the 
stock; if any dividends are to be paid, they will be paid 
to you. It is true that inasmuch as I am the real 
owner of the stock, I may perhaps succeed in forcing 
you to pay this dividend over to me j but the point is, 



328 BUSINESS ASSOCIATIONS 

you are still the owner until my name has been recorded 
upon the books of the company. 

It may be objected that this would be unjust, in that 
you may not see fit to order the company to change 
the name. That, however, is a minor consideration. If 
you have transferred your certificate of stock to me, I 
may go to the company and present it to its officers, and 
they will transfer the stock to my name without any 
action on your part. If they refuse to do so, I may file 
a bill in equity and force them to do so. But not until 
that is done am I the legal owner of the stock. 

The officers cannot, for any reasons of their own, 
refuse to record the purchaser upon the books of the 
company. A had made himself very obnoxious to the 
Standard Oil Company by writing a pamphlet in which 
he savagely attacked their methods. Subsequently, 
when he had purchased some stock of that corporation, 
its officers refused to record his name as legal owner. 
He applied to a court of equity and forced them to 
do so. 



CHAPTER V 

LIABILITY OF A CORPORATION 

1. Liability of a Corporation for its Contracts. — A 

corporation, as such, is responsible for all obligations 
into which it enters, provided the contract or obligation 
is undertaken in the proper manner, and is within the 
power conferred upon the corporation by its charter. 
The principal contracts made by a corporation should 
be signed by its officers and sealed with the corporate 
seal. It was formerly thought that all contracts of the 
corporation had to be sealed in this manner, in order to 
be binding. 

The theory was, that the only way in which the cor- 
poration could contract was by means of its common 
seal; that inasmuch as it had no personality, or only a 
fictitious personality, it could not make a contract by 
word of mouth because it had no tongue with which 
to speak. This was an absurd argument, however, for, 
as was pointed out by one of the judges before whom 
this view of the case was urged, although a corporation 
has no tongue with which to speak, neither has it a hand 
with which to write ; and if you take the view that it can- 
not make a contract by word of mouth because it has no 
tongue, neither can it make a written contract, because 
it has no hand with which to sign or to affix the seal. 

It is now well settled that minor contracts do not have 
to be sealed. If it were necessary to affix the corporate 
seal to every contract that was made with the myriads of 

329 



330 BUSINESS ASSOCIATIONS 

workmen who are employed by a great railroad, or for 
each one of the thousands of little contracts which must 
be made, it would give rise to endless trouble. Such 
contracts may be made by the proper officers of the cor- 
poration, practically in the same manner that any in- 
dividual may make a contract. The only difference is 
that the corporation is incapable of making a contract 
itself, either orally or in writing, but must always do 
it through its agents. 

2. Liability for Contracts of Promoters. — Sometimes 
individuals who are attempting to organize a corpora- 
tion, will make promises on behalf of the corporation 
when it has not yet come into existence. The question 
is. Will such contracts bind the corporation after it has 
become organized? Suppose A, B, and C are promoters 
of a mining company; they make a proposition to X 
to the effect that if he will secure subscriptions to one 
hundred thousand dollars' worth of stock, the company 
will pay him ten thousand dollars. X spends a great 
deal of time and money in getting the necessary sub- 
scriptions, and, after the company is organized, asks for 
his money, but is refused. He brings suit against the 
corporation. The corporation defends itself by saying, 
that as it was not in existence at the time this agree- 
ment was entered into, no contract was ever made ; that 
he could not have made a contract with a principal 
who did not exist, even though he had dealt with one 
who pretended to be an agent. 

This, of course, is true, but at the same time it seems 
very unjust to say that in such a case as this X could 
not recover. The argument given, however, is theoret- 
ically correct, and if X attempted to rely upon his con- 
tract, he probably would not be allowed to recover. 



LIABILITY OF A CORPORATION 331 

In such a case, however, he would be allowed to re- 
cover, not on the principle of contracts, but on the prin- 
ciple of "quasi contracts." Without going into the 
discussion of what we mean by quasi contracts at this 
point, it is sufficient to say that if one man has conferred 
some benefit upon another at his request, even though 
there was no contract between them, the second person 
is bound to pay what the benefit is reasonably worth. X 
certainly has conferred the greatest possible benefit upon 
the corporation, because if it had not been for his 
services in securing the subscriptions to the stock, the 
corporation, possibly, never could have come into exist- 
ence at all. It may be objected that the corporation did 
not request X to confer these benefits upon it and had 
no opportunity to express its desire either to accept or 
refuse them ; but the answer to this is, that the corpo- 
ration could not have refused to accept them, for to 
have done so would have been ruinous, inasmuch as 
the benefits were absolutely necessary to its corporate 
existence. Upon this theory, X would be permitted 
to recover. In some states, if the corporation, after 
becoming fully organized, passes a vote by which it 
adopts or ratifies a contract made on its behalf by the 
promoters, that contract will bind. This view, while 
theoretically faulty, works substantial justice. 

3. Liability of Corporation irregularly Organized. — We 
have referred above to a corporation which has failed to 
become properly organized by reason of its non-con- 
formity to the law. We have seen that in such a case 
a contracting party cannot charge the stockholders, as 
partners. Suppose, however, a corporation is sued by 
a person who has made a contract with it, and it seeks 
to escape liability by saying that it was not properly 



332 BUSINESS ASSOCIATIONS 

organized, and is really not a corporation at all, and, 
consequently, never could be liable on a contract. It 
is only necessary to state this proposition to see how 
absurd it would be for the courts to entertain it. If a 
corporation has traded as a corporation, has contracted 
as a corporation, has led innocent parties to believe that 
it is a corporation, it cannot now, while being sued 
upon these contractual obligations into which it has 
entered, escape liability by saying that it never was a 
corporation at all. The court will not allow it to say 
this. It is said to be "estopped " from saying it. 

4. Liability for Ultra Vires Acts. — We have before 
referred to the fact that the power of a corporation is 
limited. But if it has done an act which it has no 
power to do, does that subject it to any liability? If 
so, how great a liability ? This question is involved 
in a great deal of difficulty, and a detailed discussion 
would lead us into an argument entirely inappropriate 
in a book of this character. It is sufficient to state that 
in American courts, if a contract has been made which 
is clearly beyond the power of the corporation to make, 
and neither party has performed his part, such a contract 
is void, and no rights are thereby acquired by either 
over the other. 

If, however, one of the parties has fully performed 
his part of the contract and has conferred a substantial 
benefit upon the other, he usually is allowed to recover, 
whether he is the individual or the corporation. Some 
courts treat the contract as being binding, although 
illegal. Others treat it as void, but allow the plaintiff 
to recover on the theory of "quasi contract," to which 
we have referred in the preceding paragraph. In either 
event, the fact that the corporation has made a contract 



LIABILITY OF A CORPORATION 333 

beyond the scope of its authority subjects it to the lia- 
bility of having its charter forfeited. 

5. Liability for Torts. — We have learned that con- 
tracts which are made by the agents of a corporation on 
its behalf, will bind it, just as contracts made by an 
agent on behalf of an individual will bind him. 
Similarly, torts committed by the agents of a corpora- 
tion subject it to liability in much the same manner 
as do torts of the agents of natural persons. It was 
formerly thought that a corporation could not be 
held responsible for a tort, like deceit, involving 
some moral wrong, the theory being that the corpora- 
tion could not do anything morally wrong because 
it was only an artificial person, and consequently 
was incapable of wrong intentions. That view of the 
case has been abandoned. It is founded upon the 
same foolish idea that the corporation is responsible 
only for those things it can do itself. The only ex- 
ception to the rule that corporations are responsible 
for the torts of their agents, is in the case of charitable 
corporations. A hospital, for instance, would not be 
responsible for the wrongful acts of its servants. This 
rule is based partly upon theoretical considerations, 
but mostly upon grounds of public policy. 

6. Liability for Crimes of its Agents. — Manifestly a 
corporation cannot commit crime, but it may be respon- 
sible for the criminal acts of its agent to the same extent 
that an individual may be responsible for the criminal 
acts of his agent. We have seen that the publisher of 
a newspaper may be criminally responsible for libel 
appearing in it. If the publisher is a corporation, that 
corporation may be responsible in the same manner. 



CHAPTER VI 

RELATION OF A CORPORATION TO THE STATE 

1. Ultra Vires Acts. — We have elsewhere referred to 
the fact that the state has a more or less direct control 
over the corporations which it charters. It grants to 
them certain powers, and impliedly forbids the exercise 
or the attempt to exercise any powers not specifically 
granted to them. If they have gone beyond the limits, 
the attorney-general of the state may begin proceedings 
against them in the courts ; and if it be proven that they 
have done acts which they have no power to do, their 
charters may be forfeited. 

2. Illegal Acts. — It goes without saying that a cor- 
poration is impliedly forbidden to do any illegal act. 
Any act beyond its authority is known as an ultra vires 
act. Any act which at common law would be illegal, 
even if performed by a private person, would not only 
be beyond the power of the corporation, but would 
also be an actual infringement of the law. The most 
common act of this character of which corporations are 
guilty is an illegal combination to create a monopoly, 
or a trust. Corporations often enter into agreements 
among themselves, by which they provide that they will 
charge certain prices, that they will not compete with 
each other in certain districts, that they will regulate 
the price of raw material, etc. 

384 



RELATION OF A CORPORATION TO THE STATE 335 

These combinations are of such a nature that an 
immense power is placed in the hands of the combined 
capital and other resources of the different organiza- 
tions. It is a power which many statesmen deem 
extremely dangerous to the welfai'e of the community. 
Whether this is actually true or not cannot be deter- 
mined in our present knowledge of the subject. But if 
such a formation is made with the deliberate object of 
creating a monopoly, it is contrary to the common law, 
and therefore is illegal. If a corporation enters into 
such a contract, it has subjected itself to the liability 
of punishment by forfeiture of its charter; and more 
than one corporation has come to grief in this manner. 
The full discussion of this subject belongs perhaps more 
properly to political economy, or to legal treatises which 
go much more deeply into the subject than we can. 



SECTION III 

LIMITED PAETNERSHIPS AND JOINT-STOCK 
COMPANIES 



CHAPTER I 

LIMITED PARTNERSHIPS 

1. Distinction between Limited Partnerships and Corpora- 
tions. — Before leaving the subject of business associa- 
tions, we will briefly discuss some hybrid organizations 
which stand midway between a partnership and a cor- 
poration. One of these is called a limited partnership. 
This limited partnership can be formed only when a 
special act of the legislature of the state in which the 
parties are proposing to do business provides for it. 
It differs from an ordinary partnership in that one or 
more of the partners may invest their capital in the 
business, without becoming personally liable for the 
debts of the firm. It differs from a corporation in that 
there are no shares of stock, there is no corporate organ- 
ization, and some of the individuals are general part- 
ners, and are personally responsible as such. 

2. General and Special Partners. — When the parties 
desire to organize a limited partnership, they are com- 
pelled to go through certain formalities, which, as a 
rule, are even more stringent than the formalities for 

336 



LIMITED PARTNERSHIPS 337 

the organization of a corporation. The limited part- 
nership is composed of general and special partners. 
The general partners have active control of the business, 
and their liability does not differ from the liability of 
ordinary partners. The special partners invest capital 
in the business, but have no active control over it, and 
are liable only to the extent of the capital invested. 

In order that this immunity may be conferred upon a 
special partner, however, it is absolutely necessary that 
all the stipulated regulations shall be conformed to by 
the parties forming the association. These regulations 
are, usually, that the parties shall file a statement in a 
book kept for that purpose in the court house of the 
county where the partnership is to do business, giving 
the names of the general partners and the special part- 
ners, the character of the business they intend to carry 
on, the amount of the capital invested by the special 
partners, etc. They are then compelled to publish the 
firm name in such a way that the public may know 
who are general and who are special partners. 

3. Effect of Failure to Conform to the Statutory Rules. — 
We have seen that the stockholders of an irregularly 
formed corporation cannot be charged as partners. Just 
the reverse is true in the case we are now discussing. 
A limited partnership is not a corporation. Its mem- 
bers do not have immunity, except as such immunit}^ is 
conferred upon them by reason of their compliance with 
the statutes. If they fail to comply they are partners, 
and the special partner is just as responsible as a 
general partner. Consequentl}^, if at any time you 
wish to invest your capital in this way, it is to your 
interest to see that every single particular required 
by the law has been complied with. 



CHAPTER II 

PARTNERSHIP ASSOCIATIONS OR JOINT-STOCK 
COMPANIES 

1. Distinction between Joint-stock Company and Limited 
Partnership. — The other form of business association 
which is similar to, and yet different from, the corpora- 
tion or the partnership, is what is known as a partner- 
ship association, or joint-stock company. This form of 
association is also often called a "limited partnership." 
The name differs in different states. This also is 
an association created by statutory law, and does not 
exist at common law. A joint-stock company is more 
nearly like a corporation than it is like a partnership. 
Its members usually hold shares of stock to represent 
their claims to a share in the business. The active 
management of the concern is carried on by officers 
who are elected very much as officers are elected in a 
corporation, and the members are responsible only for 
the amount of the stock which they have contributed. 
The character of the joint-stock company, and, indeed, 
of the limited partnership, varies in the different 
states by reason of the fact that these associations 
exist only by virtue of particular state statutes. In 
most of them, however, the general features of the joint- 
stock companies are as we have indicated. In the state 
of Pennsylvania, a very recent act has been passed which 
creates a kind of joint-stock company which is almost 
exactly like a corporation, except in the one circum- 
stance that it has much greater powers. 

338 



PARTNERSHIP ASSOCIATIONS 339 

2. Statutory Requirements. — This form of association, 
which, it should be repeated, is often called a limited 
partnership, must also be formed in a particular manner, 
or the persons associating themselves together succeed 
only in forming a general partnership. The names of 
the members, the capital invested by each, etc., must be 
recorded, as in the case of limited partnerships, and, 
in addition, the vt^ord "limited" must, as a rule, be 
added to the name of the firm which is exhibited at the 
place of business. This word "limited " is for the pur- 
pose of notifying the public that the members are not 
under an absolute liability to the creditors of the 
association. 

3. Effect of Failure to Conform to the Statutory Require- 
ments. — It should be remembered that business asso- 
ciations are divided into two types, partnerships and 
corporations. If the association is a corporation, then, 
prima facie^ its members are not liable for the debts of 
the association. If it be a partnership, however, they 
are, prima facie, liable, unless they are relieved from that 
liability by some particular rule of law. Inasmuch as 
limited partnerships and joint-stock companies are not 
corporations, they are therefore partnerships, upon the 
members of which the law has conferred immunity from 
personal liability. The result is, that in the case of a 
joint-stock company, just as in the case of a limited 
partnership, if the parties fail properly to organize, so 
that they have not formed a stock company, the members 
are individually liable. The law will treat them as 
partners, unless by exact conformity to the requirements 
of the statute they have brought themselves within the 
immunity which is offered by its terms. 



DEFINITIONS 

Acceptance : The writing of the drawee upon a bill of exchange 

by which he agrees to pay it. 
Acceptance for Honor : Acceptance, for the protection of the 

drawer, by a person other than the drawee. 
Acceptor : One to whom a bill of exchange is directed and who 

agrees to pay it at maturity. 
Accommodation Indorser : One who indorses a note without 

consideration, to enable another to raise money upon it. 
Action : A suit at law. 
Administrator : A person appointed by the court to settle the 

affairs and distribute, according to law, the property of one 

who has died intestate (without making a will). 
Agent : One who acts for another, called his principal. 
Anomalous Indorsement : Indorsement by a person who is not 

the owner of a promissory note or bill of exchange. 
Assets : All the valuable property belonging to an individual, a 

corporation, or a partnership. 
Assignee : One to whom an assignment has been made. 
Assignment : A transfer of rights by one person to another. 
Assignor : One who makes an assignment. 
Assigns : Persons to whom an assignment has been made. 
Bailee: One who makes a contract for the temporary possession 

of property belonging to another. 
Bailment : Contract by which property of one person is tempora- 
rily placed in the possession of another, with a proviso for its 

return. 
Bailor : One who makes a contract for the bailment of property 

to another. 
Bankrupt : One who has done some act indicating his inability to 

pay his debts. 
Bankruptcy : Inability of a person to pay his debts. 

341 



342 DEFINITIONS 

Barter : The exchange of one piece of property for another piece 

of property. 
Bill of Exchange : A written order from one person to another, 

directing the one to whom it is addressed to pay to a third 

person a sum of money named therein. 
Bill in Equity : A petition addressed to a court of equity, setting 

forth some injury which has been received by the complainant, 

and asking for redress. 
Bona fide : In good faith, done with perfect honesty of intention. 
Carrier : One who transports persons or goods. 
Caveat Emptor : Let the buyer beware. 
Caveat Venditor : Let the seller beware. 
Cestui Que Trust : One for whose benefit property is held by a 

trustee. 
Chattel : An object of personal property. 
Check : A written order addressed to a bank by a person having 

funds deposited therein, requesting the bank to pay to some 

one named in the check a definite sum of money. 
Civil La-w : The body of law originally derived from the Romans, 

and now generally in force in Continental Europe. 
Collateral Security : A separate obligation attached to another 

contract to guarantee its performance. 
Common Law : A body of rules handed down in England from 

time immemorial, to govern the relations of men in ordinary 

civil affairs. 
Consideration: Anything of legal value which is given by one 

person to another for the making of a promise. 
Consignee : One to whom goods are shipped. 
Consignor : One who ships goods to another. 
Co-owner : One who owns property jointly with another. 
Co-proprietors : Persons who are joint owners of property and 

act together in its management. 
Corporation : An artificial person created by an act of legislature. 
Court of Equity : A court which administers justice according to 

the principles of equity. 
Court of Law : A court which administers justice according to 

the Common Law. 
Covenant : An agreement contained in a deed. 
Crime : Violation of public rights. 



DEFINITIONS 343 

Deed : A sealed contract for the transfer of property. 

De facto : As a matter of fact. 

Default : Non-performance of duty. 

Defendant : One against whom a suit at law is brought. 

Delivery : The transfer of the possession of an article to another 
person. 

Digest : A compilation arranged in an orderly manner. 

Doctrine of Marshalling : A rule of law which provides that if a 
creditor has a claim upon two funds for the payment of his 
debt, he must use the fund against which there are no other 
claims, before he is allowed to take that which is also respon- 
sible for the payment of other debts than his own. 

Dra-wer : One who draws a bill of exchange. 

Duress : Actual or threatened violence. 

Embezzle : To appropriate to one's own use, money of another 
temporarily in one's possession. 

Escrovsr : Safe-keeping — applied to deeds which are retained for 
future delivery to the person named in the deed. 

Estoppel : A rule of law by which one is forbidden to assert a fact 
which he has previously denied, either by his conduct or by 
his words. 

Executor : A person named in a will, to carry out its provisions, 
or a person appointed by the court for the same purpose. 

Executory : To be performed in the future. 

Factor : A commission merchant, — a person entrusted by another 
with the latter's goods for the purpose of sale. 

Fraud : The unlawful appropriation of another's property by 
means of false representations or deceptive acts. 

Guaranty : An engagement to pay the debt of another, upon his 
failure to do so. 

Guardian : One appointed to take charge of the person or prop- 
erty of another, or both, by reason of some disability of the 
latter, such as minority, lunacy, or feeble-mindedness. 

Indorsee : One to whom an indorsement is made. 

Indorsement : A writing on the back of a promissory note or 
bill of exchange, by the owner thereof, for the purpose of 
transferring it to another party. 

Indorsement in blank : An indorsement in which the name of 
the indorsee is omitted. 



344 DEFINITIONS 

Indorsement in full: An indorsement to a definite person. 
Indorsement without recourse : Method of indorsement by 

which the indorser passes title without rendering himself 

responsible for the payment of the instrument. 
Indorser : One who indorses. 
Infant : Any person under the legal age of majority, usually fixed 

at twenty-one years. 
Insolvency : Inability to pay debts. 
Insolvent : One who is unable to pay his debts, — state of being 

unable to pay one's debts. 
International Law : The customs and usages observed by nations 

in their intercourse with one another. 
Intestate : One who, having lawful power to make a will, has 

made none, — the state of one who dies without a will. 
Joint-Stock Companies: Partnerships in which the liability of 

members for firm debts is limited to the amount of their 

investment. 
Lease : A contract for the use of property and its return to the 

owner. 
Legal Tender : The money which one is bound by law to accept 

in legal satisfaction of a debt. 
Lien : A claim which one person has upon the property of another 

as security for some debt owed by the latter to the former. 
Liquidated Damages : Sums of money agreed to be paid by 

parties to a contract in case of its breach. 
Litigation : A contest in a court of justice, for the purpose of 

enforcing a right. 
Maker : One who has made a promise in a promissory note. 
Merger: The dissolution of one contract by the formation of 

another having superior legal force, relating to the same sub- 
ject-matter. 
Misrepresentation : An unwittingly false statement about the 

subject-matter of a contract. 
Mistake: An error as to a material fact involved in a con- 
tract. 
Municipal Law : Body of law which governs the civil actions of 

the resident of a nation. 
Negotiable Paper : Contracts to pay money, which, by their 

nature, are freely transferable from hand to hand. 



DEFINITIONS 345 

Negotiate : To transfer negotiable paper from one party to 
another. 

Nominal Partner: A person who, though not really, is appar- 
ently a partner in a firm, and who, by virtue of his osten- 
sible connection with it, is liable for the obligations of the 
firm. 

Notary Public : A public officer authorized by law to make 
official records and to administer oaths. 

Offeree : One to whom an offer is made. 

Offeror : One who makes an offer. 

Ordinances : Laws passed by City Councils. 

Parole Contract : Any contract, whether oral or written, which 
is not under seal. 

Partnership : A relation existing between individuals who are 
conducting business jointly, and which fastens upon each cer- 
tain legal responsibilities. 

Partnership Associations : Partnerships in which the liability 
of members for firm debts is limited to the amount of their 
investment. 

Payee : One to whom money is to be paid according to contract. 

Per se : In itself. 

Personal Property : Any tangible object not permanently attached 
to land. In general, movable goods. 

Plaintiff : One who inaugurates a suit at law. 

Possession : The physical control of property. 

Pcwer of Attorney : An instrument under seal designating a 
person as agent and describing his authority. 

Precedent : A ruling of a court in an individual dispute, which 
becomes a model for future controversies of kindred nature. 

Principal : One who invests a second person with authority to 
act as agent for him. 

Promisee : One to whom a promise is made. 

Promisor : One who makes a promise. 

Promissory Note : A written promise to pay a certain sum of 
money at a future time, unconditionally. 

Protest : A certification by a notary public that a bill or note has 
been refused payment at maturity. 

Proxy : One who is given the power to vote in place of another. 

Public Policy : The general rules and spirit of the law. 



346 DEFINITIONS 

Ratification : Approving something done without authority by 

another. 
Real Property : Land and its appurtenances. 
Resident : One who lives permanently in a certain place. 
Sale : The transfer of ownership in property for a price in money. 
Sanction : The consequences entailed by a breach of positive 

law. 
Seal : An impression upon wax, or a scroll, placed after the signa- 
ture of a contract or deed, to give it added solemnity. 
Simple Contract : Any contract, whether oral or written, which 

is not under seal. 
Special Partner : One who invests capital in a partnership and is 

liable for its debts only to the extent of his investment. 
Specific Performance : The actual performance of a contract by 

the party bound to fulfil it. 
Statute Law : Law enacted by legislative bodies. 
Statute of Frauds : A law providing that the evidence of certain 

contracts shall be in writing. 
Statute of Limitations : A statute providing that no suits at law 

can be had upon certain transactions after the expiration of a 

specified number of years from the time of their occurrence. 
Statutes : Enactments of legislative bodies. 
Stockholder : One who owns a certain interest in a corporation, 

which is represented by a share of stock. 
Stoppage in Transitu : Right of a consignor to recover possession 

of goods from a carrier before they have reached the end of 

their journey, provided the consignee has become insolvent. 
Surety : An engagement to undertake the duties of another on 

the failure of the latter to perform them. 
Tender : An offer of payment. 
Testator : A person who makes a will. 
Tort : An infringement of private rights. 

Transferee : One to whom the title of personal property is passed. 
Transferor : One who transfers title to personal property. 
Trustee : One who holds and employs property for the benefit of 

others. 
Ultra vires : Beyond the powers. 
Vendee : One to whom something has been sold. 
Vendor: One who sells. 



DEFINITIONS 347 

Void ; Of no force whatever. 

Voidable : Capable of becoming void or valid according to subse- 
quent events. 

Voting Trust : A limited number of individuals to whom the 
voting power of one or more corporations is entrusted. 

"Waiver: A renunciation of rights. 

Ward : One whose person or property, or both, has, on account of 
some disability, — minority, lunacy, feeble-mindedness, — been 
placed in the charge of another person. 

"Warranty : An agreement that articles sold shall possess certain 
characteristics. 



INDEX 



Acceptance, communication of, 32; 
revocation of, 37. 

Acceptance of bill of exchange, how 
made, 186; meaning of, 187. 

Acceptor liability of, 194. 

Acceptor for honor, 194. 

Accommodation paper, 209. 

Act of God, 242. 

Act of Public Enemy, 244. 

Agency, termination of, 284. 

Agents, classification of, 261 ; defini- 
tion of, 261 ; duties of, 282 ; gen- 
eral, 261 ; liability of, for torts, 
276 ; liability of, for unauthorized 
contracts, 276 ; liability of princi- 
pal for contracts of, 267; liability 
of principal for crimes of, 274; 
liability of principal for deceit of, 
272 ; liability of principal for torts 
of, 270; loyalty of, required, 282; 
necessity for, 260 ; public may rely 
upon apparent authority of, 269; 
right of, for compensation, 279; 
right of, for reimbursement, 279; 
special, 261 ; who may be, 263. 

Alterations, to discharge contracts, 
137; how made, 123. 

Ambiguous Instruments, 184. 

Assignment of contracts, 103; by 
acts of the parties, 103 ; by opera- 
tion of law, 106 ; necessity of con- 
sideration for, 105. 

Authority, delegation of, 264. 

Bailment, distinguished from sale, 
148. 

Bankruptcy, in discharge of con- 
tract. 138. 



Bill of exchange, essential character- 
istics of, 183 ; form of, 183 ; purpose 
of, 182. 

Bond, nature of, 47. 

Business Associations, nature of, 286. 

Checks, 2-30 ; certified, 231. 

Civil law, importance of study of, 6 ; 
origin of, 5. 

Common carrier of goods, an insurer, 
242; bound to charge reasonable 
prices, 239; contracts to limit 
liability of, 247; definition of, 
234 ; distinguished from private car- 
rier, 235 ; duty not to discriminate, 
238 ; duty to carry for all, 237 ; ex- 
cuses of, for non-delivery of goods, 
245; liability of, for delay, 246; 
liability of, when shipper assumes 
responsibility, 244 ; lien of, 251 ; 
right of compensation, 250; when 
liability attaches, 241 ; when lia- 
bility terminates, 248. 

Common carrier of passengers, con- 
tracts limiting liability of, 256; 
definition of, 252 ; duty not to dis- 
criminate, 254; duty to accept all, 
253; liability for baggage, 257; 
not an insurer, 255 ; right of com- 
pensation, 259; right to make 
regulations, 259; when liability 
terminates, 258. 

Common law, development of, 8; 
first digest of, 7 ; origin of, 6. 

Compensation, right of common car- 
rier to, 250. 

Conditional subscriptions, liability 
of subscribers for, 315. 



349 



350 



INDEX 



Conditions, effect of failure to per- 
form, 162; implied, 163; subse- 
quent, 164. 

Conflict of laws, 228. 

Consent, necessity for, 71. 

Consideration, 61 ; absence of, as a 
defence to negotiable paper, 222; 
failure of, as defence to negotiable 
paper, 223; inadequacy of, 50; 
meaning of, 50 ; moral, 66 ; past, 
61. 

Contracts, alteration of, 123; as- 
signment of, 103; capacity of 
parties to, 19 ; classification of, 42 ; 
consideration necessary for, 42; 
definition of, 15 ; discharge of, 125 ; 
essential elements of, 19 ; explana- 
tion of, 119; forbidden by statute, 
92; formal, 43; immoral, 94; in 
restraint of marriage, 97 ; in re- 
straint of trade, 97; interpretation 
of, 114; nature of, 18; of lunatics, 
24 ; of record, 43 ; persons affected 
by, 100 ; simple, 49 ; to promote 
litigation, 95. 

Contracts of drunken persons, 25. 

Contracts of infants, 20; ratifica- 
tion of, 22; -which are binding, 
23. 

Contracts under seal, necessity for, 
42. 

Co-proprietorship, test of partner- 
ship, 289. 

Corporation, attributes of, 308 ; citi- 
zenship of, 311; de facto, 320; 
definition of, 307 ; distinguished 
from partnerships, 306; distin- 
guished from limited partnerships, 
336; how created, 308; how dis- 
solved, 312; irregularly formed, 320; 
irregularly organized, liability of, 
331; liability of, for contracts of 
promoters, 330; liability of, for 
crimes of agents, 333; liability 
of, for contracts ; liability of, for 
torts, 333; liability of , for Ultra 
Vires acts, 332; organization of, 
309; power of, 309. 

Courts of common law, 14 ; of equity, 
14. 



Covenants in deeds, 111 ; in leases, 
109 ; restrictive, enforced inequity, 
112. 

Crimes, liability of corporations for, 
333. 

Crimes of agents, liability of prin- 
cipals for, 274. 

Custom of merchants, 175. 

Damages for breach of contract, 139. 

Deceit of agent, liability of principal 
for, 272. 

De facto corporations, 320. 

Defences, absolute, 215; personal, 
219. 

Delivery, meaning of, 157. 

Dividends, rights of stockholders to, 
325. 

Divine law, 3. 

Divisible contracts, breach of, 130. 

Doctrine of marshalling, 298. 

Drawee of a check, liability of, 230. 

Drawer of bill of exchange, condi- 
tions of liability of, 197; liability 
of, 196; when liable without per- 
formance of conditions, 207. 

Drawer of check, liability of, 230. 

Duress, 90; as a defence to nego- 
tiable paper, 222. 

Exchange, distinguished from sale, 
148. 

Extinguishment of negotiable paper, 
by alteration, 217 ; by cancellation, 
216 ; by release, 218 ; by re-trans- 
fer, 218. 

Factors' acts, 155. 
Fellow-servant rule, 279. 
Firm creditors, rights of, 296. 
Formal contracts, 43. 
Fraud, 85 ; as a defence to negotiable 
paper, 221. 

General partners, 336. 

Incapacity, as a defence to negoti- 
able paper, 215. 

Illegal acts of corporations, effect of 
charter, 334. 



INDEX 



351 



Illegality, as a defence to negotiable 
contracts, 216 ; effect of, upon colla- 
teral contracts, 93; as a personal 
defence to negotiable paper, 221 ; 
as an absolute defence to negotia- 
ble paper, 216; effect of knowledge 
of, 99; resulting from breach of 
common law, 91; resulting from 
breach of statute law, 92, 

Impossibility of performance, 134. 

Indorsement, how made, 189; neces- 
sity of, 188. 

Indorser, irregular, 190 ; liability of, 
196 ; conditions of liability of, 197 ; 
remedy against a prior indorser, 
199 ; when liable without perform- 
ance of conditions, 207 ; of a check, 
liability of, 231. 

Innocent purchaser for value, who 
is, 224. 

International law, 4. 

Irregular indorser, 190. 

Joint makers, liability of, 192. 
Joint-stock company, distinguished 

from limited partnership, 338. 
Judicial decision, authority of, 10. 

Law, classification of, 3; develop- 
ment of, 15 ; divine or revealed, 3 ; 
international, 4; making of, 1; 
moral, 3; municipal, 4; of human 
action, 2; remedial, 14; substan- 
tive, 12 ; unwritten, 5 ; written, 5. 

Legality of object, necessity for, 
92. 

Liability, contracts of common car- 
rier to limit, 247; contracts of 
common carrier of passengers to 
limit, 256 ; of common carrier, for 
delay, 246; termination of, 248; 
when attaches, 241 ; when shipper 
assumes responsibility, 244; of 
common carrier of passengers, 
255 ; for baggage, 257; termination 
of, 258 ; of estate of partner, 300 ; 
of partner, nature of, 296. 

Lien, of common carrier for price of 
carriage, 251 ; of vendor for unpaid 
purchase money, 169. 



Limited partnership, distinguished 
from a corporation, 336; distin- 
guished from a joint-stock com- 
pany, 338. 

Liquidated damages, 116. 

Lost instrument, when owner of may 
sue upon, 191. 

Maker, liability of, 191. 
Marshalling, doctrine of, 298. 
Merger, 46. 
Misrepresentation, 78 ; remedies for, 

84. 
Mistake, 72 ; effect of upon contract, 

77. 
Moral law, 3. 
Municipal law, 4 ; divisions of, 12. 

Natural laws, 1. 

Necessity, agents by, 265. 

Negotiable contracts, general nature 
of, 175. 

Negotiable paper, how it circulates, 
188. 

Negotiation of bills and notes, man- 
ner of, 213 ; rules governing, 223. 

Negotiation prior to maturity, 213. 

Nominal partners, 289. 

Notice of dishonor, 204 ; by whom it 
should be given, 206; manner of 
serving, 207 ; time of sending, 204 ; 
to whom it should be given, 207 ; 
waiver of, 211 ; when unnecessary, 
207 ; where it should be sent, 206. 

Offer, acceptance of, 31 ; making of, 

29; revocation of, 37; to revoke, 

39; when operative, 38. 
Offer and acceptance, 26; how 

brought about, 28. 
Offeror, assumes risk of miscarriage, 

36. 
One-man companies, 321. 
Oral evidence , admission of, in equity, 

123 ; admission of, to alter written 

contracts, 120. 
Overdue paper, negotiation of, 227. 

Partners, agents for associates, 302; 
general and special, 336; nature 



352 



INDEX 



of liability of, 296 ; power to exe- 
cute sealed contracts, 303; power 
to make negotiable contracts, 304; 
power to make simple contracts, 
302 ; property of, 291 ; share of per- 
sonal property, 295; what each 
owns, 293; who are, 287. 

Partnership, distinguished from a 
corporation, 306 ; how created, 287 ; 
how dissolved, 305; how to deter- 
mine existence of, 288 ; limited, 
distinguished from corporations, 
336; power to sell property of, 
301. 

Payment before maturity as a de- 
fence to negotiable paper, 221. 

Performance, failure of, 133; made 
impossible by one party, 132. 

Perpetual succession, 310. 

Presentment, 200 ; place of, 202 ; time 
of, 203 ; to whom made, 301. 

Principal, absolute duties of, 281 ; 
bound by apparent authority of 
agent, 269; death of, 285 ; duty of, 
to compensate, 279; duty of, to re- 
imburse, 279; insanity of, 285; 
liability of, for crimes of agents, 
274; liability of, for contracts of 
agent, 267 ; liability of, for deceit 
of agent, 272 ; liability of, for ma- 
licious wrongs of agent, 271; 
liability of, for torts of agent, 270 ; 
responsibility of, for injuries to his 
servant, 279; who may be a, 263; 
unnamed, liability of, 277; un- 
named, rights of, 278. 

Promissory .note, definition of, 176; 
essential characteristics of, 177; 
form of, 177. 

Public calling, nature of, 233. 

Public policy, contracts contrary to, 
94. 

Quasi partners, 289. 

Ratification, of acts done by unau- 
thorized agents, 266. 

Remedial law, 14. 

Representation, distinguished from 
warranty, 79. 



Revealed law, 3. 

Right of action, discharge of, 145. 

Rights of persons, 12. 

Rights of things, 13. 

Sale, conditional, 161 ; distinguished 
from bailment or exchange, 148 ; 
how to make contract of, 148; on 
condition that buyer shall be 
pleased, 161. 

Sale or return, contracts of, 164. 

Seal, effect of, 45; necessity for, 
46. 

Shares of stock, personal property, 
311 ; transfer of, 327. 

Special partners, 336; liability of, 
336 ; liability of, when partnership 
irregularly organized, 337. 

Specific performance in courts of 
equity, 141. 

Statute of frauds, 67 ; effect of, upon 
unwritten contracts, 69. 

Statute of limitations, 146. 

Stockholders, liability of, 316; of 
irregular corporations, liability of, 
319; of joint-stock companies, 
liability of, 337; of joint-stock 
companies, liability of, when com- 
pany irregularly formed, 339; 
rights to receive dividends, 325 ; 
rights to sell shares, 310; rights 
to share in surplus after dissolu- 
tion of corporation, 326; rights to 
vote, 323; rights with respect to 
management, 324. 

Stoppage, in transitu, 170. 

Sub-contractors, liability of, for act 
of servants, 273. 

Subscribers to stock, liability of, 314. 

Substantive law, 12. 

Survivorship of legal title to prop- 
erty of a partner, 292. 

Title, when it passes by contract of 
sale, 157; when it passes under 
contracts for conditional sales, 161. 

Title of partner, survivorship of, 
292. 

Torts, liability of corporation for, 
333. 



INDEX 



353 



Transfer of negotiable paper, rules 
governiug, 223. 

Undue influence, 90. 

Ultra vires acts, liability of corpora- 
tion for, 832 ; to state, 334. 

Undisclosed principal, liability of, 
277 ; rights of, 278. 

Unwritten law, 5. 



Warrant, implied, by manufacturer, 
168; implied, of quality, 167. 

AVarrant of attorney, 47. 

"Warranties, express, 166; implied, 
of title, 166. 

Warrants, remedies for breach of, 
169. 

Written law, 5. 

Wrongs, private, 13; public, 13. 



DEC 3 1800 



LIBRARY OF CONGRESS ^ 



029 765 002 6 



